Regulatory Programs: Opportunities to Enhance Oversight of the Real Estate Appraisal Industry
Published: 2004-03-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss our report on  federal oversight of the real estate appraisal industry. 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.
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. 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  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  Foundation, and provides grants to the Foundation to support the Title XI- related activities of its two boards—Appraisal Standards Board and  Appraiser Qualifications Board.
Entities involved in the Title XI regulatory structure described a number of  factors that they believe constrain their ability to perform more effectively  and efficiently. For example, officials of the Appraisal Standards Board  and the Appraiser Qualifications Board told us that insufficient federal  grant funding may impede their ability in the future to ensure that  standards and qualifications evolve with changing conditions, such as how  to appraise contaminated or polluted properties. State appraiser  agencies—which are funded at the state level—reported resource  limitations as the primary impediment in carrying out their oversight  responsibilities. For example, of the 54 states and territories that  responded to our survey, 26 reported that the current number of  investigators was insufficient for meeting the states’ regulatory  responsibilities, 37 cited a need for increasing the staff directed at  investigations, and 22 cited a need for more resources to support litigation.  The five federal financial institution regulators reported no major  impediments to carrying out their Title XI responsibilities. The Appraisal  Subcommittee reported that 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  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 non- financial 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.
subsections: section_title: Background
paragraphs: An appraisal is an opinion of the value of a property as of a specific date.  Appraisers generally consider a property’s value from three points of  view—cost, income, and comparable sales—and determine an estimated  value based upon weighing the three valuation methods. The comparable  sales approach, which compares and contrasts the property under  appraisal with recent offerings and sales of similar property, is usually  considered most appropriate for estimating the value of residential real  estate.
The primary role of appraisals in the mortgage loan underwriting process  is to provide evidence that the collateral value of property is sufficient to  avoid losses on loans if the borrower is unable to repay the loan.  Consumers often mistakenly assume that appraisals are intended to  validate the purchase price of the property in question. Furthermore,  appraisals are sometimes confused with home inspections, which are  intended to warn consumers about serious defects in the home being  purchased that should be repaired. In a loan transaction, the lender rather  than the borrower engages the appraiser, and this usually occurs after the  borrower has agreed to purchase the property.
The primary purpose of the appraisal reforms contained in Title XI was to  assist in protecting the federal deposit insurance funds—and, by  extension, mortgage lenders—from avoidable losses. Officials of the  federal financial institution regulators noted that faulty and fraudulent real  estate appraisals have been associated with losses incurred by federally  insured financial institutions and have resulted in financial harm to  individual consumers. However, all of the regulators stated that real estate  appraisals have not been a major factor in the failure of depository  institutions since the passage of Title XI.
section_title: Title XI Created a Complex Oversight Structure
paragraphs: 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.
subsections: section_title: Appraisal Foundation’s Boards Establish Appraisal Standards and Minimum Appraiser Certification Criteria
paragraphs: 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. The ASB is responsible for setting standards for  appraisals, which are contained in its Uniform Standards of Professional  Appraisal Practice (USPAP). Under Title XI, these minimum standards  apply to all federally related transactions for which an appraisal is  required. The standards cover both the steps appraisers must take in  developing appraisals and the information the appraisal report must  contain.
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.
section_title: State Agencies Oversee the Licensing and Certification of Real Estate Appraisers
paragraphs: Under Title XI, states may establish agencies to certify and license  appraisers. At the time of our survey, all 50 states, the District of  Columbia, and 4 of the U.S. territories had established such agencies,  which typically oversee the activities of appraisers for all types of  transactions, including those that are federally related. All of the states  and territories had established programs for certifying appraisers, and  nearly 70 percent reported that they had introduced qualifications in  addition to those established by the AQB.
At the time of our review, 6 states did not provide for licensed appraisers,  according to the Appraisal Subcommittee. Those that did and responded  to our survey reported a variety of licensing requirements. For example,  some states did not require licenses unless appraisers planned to work  with federally related transactions, while other states required appraisers  to be either licensed or certified to perform real estate appraisals, even for  transactions that are not federally related. The states’ programs typically  included temporary and reciprocal licensing provisions, though as  discussed below, the provisions varied. (Title XI requires states to  recognize on a temporary basis real estate appraisers who have been  certified or licensed by another state if certain conditions are met, and  encourages states to develop reciprocity agreements that readily authorize  appraisers who are licensed by and in good standing with their home state  to perform appraisals in other states.)
In addition to conducting certification and licensing activities, states with  certifying and licensing agencies are required under Title XI to provide the  Appraisal Subcommittee with the names of those appraisers who become  certified or licensed in accordance with Title XI, and to collect from them  an annual registry fee that goes to the subcommittee. All of our survey  respondents reported that they approve courses for appraisers’ education  or training, enforce state regulations concerning appraisals, and  investigate complaints. Over half of the states reported that they had  adopted appraisal standards in addition to those set by the ASB.
Although the states are responsible for the certification and licensing of  appraisers, the Appraisal Subcommittee has a role in ensuring that state  qualifications satisfy Title XI objectives. Under Title XI, the federal  financial institution regulatory agencies are to accept a state’s  certifications and licenses unless the Appraisal Subcommittee issues a  written finding that the state certifying and licensing agency has failed to  recognize and enforce the standards, requirements, and procedures of  Title XI; does not have enough authority to carry out its functions under  Title XI; or does not make decisions on appraisal standards and  qualifications or supervise appraiser practices in a way that carries out the  purposes of Title XI.
section_title: Federal Regulators Determine Which Transactions Require Appraisals and Establish Compliance Standards for Depository Institutions
paragraphs: Title XI requires that the federal financial institution regulators prescribe  the categories of federally related transactions that should utilize a state  certified appraiser and those that should utilize a state licensed appraiser.  The statute provides that certified appraisers must be used for federally  related transactions having a value of $1,000,000 or more. The federal  financial institution regulators generally require the use of certified  appraisers for commercial transactions of $250,000 or more and “complex”  residential transactions of $250,000 or more. The regulators are  responsible for determining whether other types of transactions warrant  the use of a certified appraiser. All other federally related transactions,  unless subject to an exemption as authorized under Title XI, may utilize a  state-licensed appraiser.
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.  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 institution- affiliated parties such as appraisers.
section_title: Appraisal Subcommittee Monitors Title XI Regulatory Activities
paragraphs: 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. 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.
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  real estate flipping. 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.
section_title: Entities Cited Potential Impediments to Fulfilling Their Title XI Roles
paragraphs: 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.
subsections: section_title: The Appraisal Standards and Appraiser Qualifications Board Cited Concerns about Federal Funding
paragraphs: 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.
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.
section_title: States Cited Funding Limitations and Frequent USPAP Updates as Impediments
paragraphs: In responding to our survey, most of the states identified funding and  staffing deficiencies as the most serious challenges they faced in carrying  out their Title XI duties. According to Appraisal Subcommittee officials,  the subcommittee’s general counsel analyzed whether the subcommittee  could provide grants to the states to help provide funding for their Title XI  activities, and determined that it lacked the necessary legal authority.
Based on survey data, the average state agency had about 3 staff members,  who were responsible for overseeing almost 2,000 appraisers. Many of  these state agencies reported that they needed to share resources— administrative staff, office space, investigators, or all three—with other  state agencies in order to perform their Title XI duties. The survey results  indicated that investigations of complaints about problem appraisers  suffered most from these shortages. The majority of states sharing  resources were sharing investigators, who often had no real estate  appraisal experience. One state official explained that without adequate  funding states could not effectively administer their appraiser certification  programs or investigate and dispose of disciplinary cases in a timely  manner. Another state official noted that his agency knew that more  enforcement and faster turnaround times in investigating complaints were  needed but that limited resources hindered it. We recommended that the  Appraisal Subcommittee explore potential options for funding or  otherwise assisting the states in carrying out their Title XI activities,  particularly the investigation of complaints against appraisers.
Seventy percent of the state appraiser regulatory agencies indicated that  USPAP updates were too frequent. One state reported that frequent  changes to USPAP have made processing complaints difficult because  staff members have to determine what appraisal standards were in place  at the time of the questionable appraisal. According to ASB officials,  USPAP has been in place for only 15 years, and annual updates have been  needed because so many changes have occurred in the appraisal industry.  Moreover, they told us that many of the changes that have been  incorporated into USPAP are a result of requests from state regulators.  The officials explained that over the years the ASB has experimented with  different formats for updating USPAP but has found that issuing an annual  publication has been the best way to ensure that everyone is using the  same standards. The ASB and the Foundation are working on developing a  future publishing schedule of having USPAP issued biennially. In addition,  ASB officials stated that they have recently started providing state  regulators with newsletters that highlight any changes, modifications, or  clarifications to USPAP or appraiser qualification criteria.
section_title: Appraisal Subcommittee Stated That Rule-Making Authority and Enforcement Options Could Facilitate Its Oversight of States
paragraphs: 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  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.
section_title: Industry Participants Raised Various Concerns about the Title XI Oversight Structure
paragraphs: 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.
subsections: section_title: Differences Among State Licensing Programs
paragraphs: According to many of the groups we contacted, Title XI’s most significant  shortcoming is the provision that leaves the criteria for licensed appraisers  to each state, including decisions such as how often appraisers should be  licensed and whether they should be licensed at all. According to an  official from the Appraisal Subcommittee, Title XI’s intent was to ensure  that appraisers for federally related transactions met minimum  requirements for experience and education and had been examined in  order to ensure a minimum level of competency. But Title XI specifically  provides that the Appraisal Subcommittee will not set requirements for  licensing and that any subcommittee recommendations are nonbinding.  Some groups believe that this provision has led to a lack of uniform  qualifications in licensing across the country (for example, in education  and experience) and may also have helped to create an environment  conducive to mortgage fraud.
At the time of our review, officials from the Appraisal Subcommittee  reported that most states have adopted provisions requiring that licensed  appraisers meet AQB recommended criteria. However, six states did not  have a state-licensed appraiser category, and six had licensing  requirements that were less stringent than the AQB’s. As a result,  subcommittee officials said, some licensed appraisers may not meet  recommended qualifications criteria. For example, in 2002, one state  passed legislation that eliminated the experience requirement for its  licensed appraisers; and, in 2001, another state revised its licensing criteria  to comply with AQB requirements but at the same time “grandfathered” in  several hundred licensed appraisers.
According to two regulatory officials, problems related to the lack of  uniformity in licensing appraisers are compounded by the fact that Title XI  also makes licensing voluntary at the state level. Voluntary licensing  means that the state does not have a legislative requirement that  appraisers be licensed or certified. However, the volunteer states do  provide the opportunity for an appraiser to become licensed or certified in  order to perform federally related transactions. As of March 2003, 10 states  were classified as being in the voluntary licensing category. Some  regulators, as well as one appraiser trade group, view voluntary licensing  as a serious flaw in the industry’s regulatory structure and a probable  contributor to mortgage fraud. Moreover, voluntary licensing may  indirectly place the onus on financial institutions to ensure that appraisers  for federally related transactions have the appropriate qualifications. One  federal financial institution regulator reported that most of the mortgage  fraud problems it has encountered have occurred in states where licensing  is voluntary. An earlier Federal Bureau of Investigation testimony at a  special congressional hearing on predatory lending in March 2000 echoed  this view. According to that testimony, the most egregious property  flipping problems have occurred in states where licensing is voluntary for  transactions that are not federally related.
Industry participants also cited a lack of uniformity in the way states grant  temporary and reciprocal licenses. Because a state may not recognize the  credentials from another state, appraisers often have to carry multiple  state licenses. The Appraisal Subcommittee has issued policy statements  on temporary practice and encouraging reciprocity. However, our survey  indicated that state regulatory agencies continue to vary widely on these  issues. For example, of the 53 states and territories that responded to this  question, 40 issued temporary licenses for single assignments, 16 allowed  an appraiser only one temporary license at a time, and 15 limited the  number of temporary licenses an appraiser could receive annually. Six of  the 54 respondents to our survey indicated that visiting appraisers are  required to pass a state exam in order to receive a reciprocal license. This  practice is inconsistent with the Appraisal Subcommittee’s guidance  recommending that states accept licenses or certification from other  states meeting AQB requirements.
section_title: Transactions Not Covered by Title XI
paragraphs: 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. 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.
section_title: Costs and Lack of Uniform Approval Processes for Appraiser Education Courses
paragraphs: Several state regulators and education providers expressed concerns  about the expenses and lack of uniformity in the processes associated  with approving instructors and courses for appraisers’ continuing  education. A representative of an appraisers’ trade group noted that  gaining approval for a course and an instructor in one state does not  necessarily translate into approval in other states. As a result, the trade  group spent around $30,000 having courses for a July 2000 training  conference approved in all jurisdictions. Some appraisal industry  participants believe that the added cost and procedures involved in  acquiring approval in each state is overly burdensome.
AQB officials told us that the board has set up a voluntary national system  for approving courses and that these concerns had influenced their  project. According to the AQB, the course approval program was designed  to be a convenience for both course providers and state regulators while  helping to ensure quality appraisal courses. However, AQB’s course and  instructor approval programs have met opposition in some quarters. For  example, some state officials and other industry participants stated that  requiring AQB approval for all USPAP refresher courses and instructors  and restricting course materials and examinations to AQB publications— for which AQB charges a royalty fee—represent a conflict of interest. In  addition, some education providers have stated that the fees charged by  the AQB for its course and instructor approval are excessive. On the other  hand, some state and federal financial institution regulators believe that  the Appraisal Foundation and its boards possess expertise and resources  the states do not have and thus are needed to ensure that the quality of  appraiser education and training is not compromised.
Similarly, some states and educators have expressed concern that the AQB  and Appraisal Subcommittee have encroached upon state authority in  setting certain appraisal standards and appraiser qualifications. For  example, the regulatory agency and an education provider in one state  objected to certain AQB education requirements for certified appraisers,  in particular a requirement that education providers be certified through  the AQB’s instructor certification program. As part of its industry  monitoring function, the Appraisal Subcommittee reviewed those  standards and determined that the AQB had acted appropriately in  adopting them. The Appraisal Subcommittee also requested a legal opinion  from the Legal Advisory Group of the Federal Financial Institutions  Examination Council on the scope of AQB’s authority to adopt education- related standards for certified appraisers; the scope of the Appraisal  Subcommittee’s responsibility in monitoring the AQB; and the Appraisal  Subcommittee’s authority to oversee state regulators’ implementation of  AQB standards. 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.
section_title: Variations in State Regulatory Agencies’ Enforcement of Title XI Requirements
paragraphs: 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  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.
section_title: No Clear Consensus Regarding the Need for Changes to the Title XI Regulatory Structure
paragraphs: Among the various representatives of trade groups, education providers,  and other industry participants that we contacted, there were differing  opinions as to what, if any, changes were necessary to Title XI. Likewise,  the responses to the survey that we sent to the state appraiser agencies did  not indicate a clear consensus regarding states’ views of the impacts of  eliminating some of the central aspects of the Title XI regulatory structure.
Some officials from state appraiser agencies have expressed strong  viewpoints regarding the need for changes to Title XI. For example, an  official from one of the state appraiser regulatory agencies stated that the  states are now in a position to oversee the real estate appraisal industry  without any federal involvement, much as they do other professions. He  suggested that Congress eliminate the Appraisal Foundation and the AQB  and make the ASB independent and self-supporting. An official from  another state regulatory agency said that to correct the present system’s  problems, Congress would need to completely restructure the Title XI  structure. He recommended eliminating the Appraisal Subcommittee and  the Appraisal Foundation, replacing them with a new board at the federal  level. The new board would represent the appraisal industry more broadly  and have strong Congressional accountability. He also suggested that  Congress clearly designate the states as having sole responsibility for  administering and enforcing Title XI.
However, our survey of the state appraisal agencies showed a wide variety  of views. For example, 22 states and territories (41 percent) said that  eliminating the Appraisal Subcommittee would enhance their ability to  regulate appraisers, while 17 (31 percent) responded that eliminating the  subcommittee would be a hindrance. The remaining states felt that not  having the subcommittee would neither help nor hinder regulation.  Similarly, 31 and 23 states, respectively, indicated that eliminating the ASB  and AQB would hinder their efforts to regulate appraisers, while 10 and 21  states, respectively, indicated that eliminating the ASB and AQB would be  helpful.
In conclusion, Title XI brought about significant changes in the real estate  appraisal industry. According to federal financial institution regulators,  real estate appraisals have not been a major factor in the failure of  federally insured financial institutions since the passage of Title XI.  However, opportunities exist to enhance the effectiveness of the current  regulatory system to help ensure that federally related transactions are  based on accurate assessments of the value of properties used as  collateral for loans.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions at this time.
section_title: Contacts and Acknowledgments
paragraphs: 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.
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