Real Estate Appraisals: Appraisal Subcommittee Needs to Improve Monitoring Procedures
Published: 2012-01-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Real estate appraisals have come under increased scrutiny in the wake of the recent mortgage crisis. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 created an oversight structure for appraisals and appraisers that involves state, federal, and private entities. This structure includes ASC, a federal agency responsible for monitoring these entities’ Title XI-related activities. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded ASC’s Title XI role and required GAO to examine ASC’s activities and exemptions to federal appraisal requirements. This report discusses (1) how ASC is carrying out its original Title XI responsibilities, (2) ASC’s actions and plans to implement Dodd-Frank Act provisions, and (3) regulatory dollar thresholds for determining when an appraisal is required. To do this work, GAO reviewed ASC records and reports, surveyed state appraiser regulatory agencies, analyzed government mortgage data, and interviewed industry stakeholders.
section_title: What GAO Found
paragraphs: The Appraisal Subcommittee (ASC) has been performing its monitoring role under Title XI, but several weaknesses have potentially limited its effectiveness. For example, Title XI did not originally provide ASC rulemaking and enforcement tools that could be useful in promoting state compliance. In addition, ASC has not reported or clearly defined the criteria it uses to assess states’ overall compliance levels. Title XI charges ASC with monitoring the appraisal requirements of the federal financial institutions regulators, but ASC has not defined the scope of this function—for example, by developing policies and procedures—and its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related. Not having appropriate policies and procedures is inconsistent with federal internal control standards designed to promote effectiveness and efficiency and limits the accountability and transparency of ASC’s activities.
ASC faces potential resource and planning challenges in implementing some Dodd-Frank Act provisions. ASC has only 10 staff and is funded by appraiser registration fees that totaled $2.8 million in fiscal year 2010. The Dodd-Frank Act expands ASC’s responsibilities and authorities. For example, the act requires ASC to establish a national appraiser complaint hotline and provide grants to state appraiser regulatory agencies, and it gives ASC limited rulemaking and enhanced enforcement authorities to help address prior weaknesses. As of October 2011, ASC had completed several implementation tasks that required no rulemaking or creation of new programs and was in various stages of progress on the others. The potentially resource-intensive nature of some remaining tasks will require careful planning. For example, operating a complaint hotline may require investments in information technology and the creation of screening and follow-up procedures. Also, implementing a grant program will require ASC to set aside funds, develop funding criteria, and oversee grantees. ASC is in the process of developing a strategic plan to help carry out these efforts with available resources.
GAO found that more than 70 percent of residential mortgages made from 2006 through 2009 were $250,000 or less—the regulatory threshold at or below which appraisals are not required for transactions involving federally regulated lenders. In recent years, however, the threshold has had a limited impact on the proportion of mortgages with appraisals because mortgage investors and insurers such as Fannie Mae, Freddie Mac, and the Federal Housing Administration have generally required appraisals for mortgages both above and below the threshold. While these entities currently dominate the mortgage market, federal plans to scale them back could lead to a more privatized market, and whether this market would impose similar requirements is not known. None of the appraisal industry stakeholders GAO spoke with argued for increasing the threshold. Some stakeholders said the threshold should be lowered or eliminated, citing potential benefits to risk management and consumer protection. Others noted potential downsides to lowering the threshold, such as requiring more borrowers to pay appraisal fees and requiring appraisals on more transactions for which cheaper and quicker valuation methods may be sufficient.
section_title: What GAO Recommends
paragraphs: To help ensure effective implementation of ASC’s original Title XI and additional Dodd-Frank Act responsibilities, ASC should clarify and report the criteria it uses to assess states’ overall compliance with Title XI and develop specific policies and procedures for its other monitoring functions. GAO provided a draft of this report to ASC and seven other agencies. ASC and two other agencies agreed with the report’s recommendations. One agency did not comment on the recommendations, and the others did not provide written comments.

section_title: Letter
paragraphs: In recent decades, periods of financial turmoil have focused the federal  government’s attention on oversight of the real estate appraisal industry.  Appraisals play a critical role in mortgage underwriting by providing  evidence that the market value of a property is sufficient to help mitigate  losses if the borrower is unable to repay the loan. Concerned that faulty  and fraudulent appraisals contributed to the federal government’s losses  during the savings and loan crisis of the 1980s, Congress enacted Title XI  of the Financial Institutions Reform, Recovery, and Enforcement Act of  1989 (FIRREA). Title XI made reforms to address both the quality of  appraisals and the qualifications of appraisers who perform them in order  to protect federal deposit insurance funds and promote safe and sound  lending. Title XI also authorized federal regulators to establish dollar  thresholds at or below which an appraisal is not required for a “federally   Additionally, to help ensure that the purpose of the  related transaction.”legislation was carried out, Title XI created a regulatory structure to  monitor and oversee the real estate appraisal industry, including a federal  entity called the Appraisal Subcommittee (ASC) of the Federal Financial  Institutions Examination Council (FFIEC) to monitor the title’s  implementation. As we reported in July 2011, the recent mortgage crisis  renewed questions about real estate appraisals, including conflicts of  interest in the appraisal process and perceptions that appraisal quality  had diminished. The Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act), enacted by Congress in July 2010,  amended Title XI and contains provisions designed to address these  issues and gives ASC additional responsibilities and authorities.
The remaining member of FFIEC is the State Liaison Committee, which includes  representatives from the Conference of State Bank Supervisors, the American Council of  State Savings Supervisors, and the National Association of State Credit Union  Supervisors. a national registry of state-licensed and state-certified appraisers who  may perform appraisals in connection with federally related transactions.  ASC is a self-supporting agency that funds its activities and operations  through a fee assessed against appraisers that states collect and forward  to ASC.
The Dodd-Frank Act directed us to study ASC’s ability to carry out its  functions and examine regulatory exemptions to appraisal requirements.Accordingly, this report discusses (1) how ASC is performing its Title XI  functions that existed prior to the passage of the Dodd-Frank Act, (2)  ASC’s plans and actions to implement Dodd-Frank Act provisions, and (3)  analysis and stakeholder views on existing dollar-based exemptions to  appraisal requirements for federally related transactions. The act also  directed us to provide data on state enforcement actions against  appraisers and examine the extent to which a national appraisal  repository would benefit ASC. Appendix II contains detailed information  on state enforcement actions against appraisers from 2001 through 2010.  Appendix III contains discussion of the potential benefits and challenges  of a national appraisal repository.
To address these objectives, we reviewed Title XI of FIRREA and  relevant Dodd-Frank Act provisions. We reviewed ASC policies and  procedures, including its rules of operation, policy and procedures  manual, Title XI policy statements, and compliance review manual. We  also reviewed ASC records such as its annual reports to Congress, board  meeting minutes, state compliance review reports, and documents  concerning grants to the Appraisal Foundation. In addition, we analyzed  data from ASC’s national registry of appraisers and FFIEC’s Home  Mortgage Disclosure Act (HMDA) database. We tested the reliability of the data by conducting reasonableness checks on data elements to  identify any missing, erroneous, or outlying data. We also reviewed  documentation on the process that the data providers use to collect and  ensure the reliability and integrity of the data. We concluded that the data  we used were sufficiently reliable for our purposes. Using a Web-based  questionnaire, we surveyed appraiser regulatory agencies in the 50  states, the District of Columbia, and 4 U.S. territories about their  experience in implementing Title XI and their views on ASC and  provisions in the Dodd-Frank Act. We received completed surveys from  50 of the 55 agencies. A copy of the questionnaire, including summary  responses to each question, can be found in an e-supplement to this  report, GAO-12-198SP. Finally, we interviewed ASC board members and  staff; officials from CFPB, Federal Bureau of Investigation (FBI), FDIC,  Federal Reserve, FHFA, HUD, NCUA, OCC, and Office of Thrift  Supervision (OTS); representatives of the Appraisal Foundation; state  appraisal regulatory officials; and a range of appraisal industry  participants, including trade groups that represent appraisers and lenders  and officials from Fannie Mae and Freddie Mac, two government- sponsored enterprises (the enterprises) that establish standards for  appraisals used in connection with mortgages that they purchase.  Appendix I contains a more detailed description of our objectives, scope,  and methodology.
We conducted this performance audit from November 2010 to January  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Before originating a residential mortgage loan, a lender assesses the risk  of making the loan through a process called underwriting, in which the  lender generally examines the borrower’s credit history and capacity to  pay back the mortgage and obtains a valuation of the property to be used  as collateral for the loan. Lenders need to know the property’s market  value, which refers to the probable price that a property should bring in a  competitive and open market, in order to provide information for  assessing their potential loss exposure if the borrower defaults. Lenders  also need to know the value in order to calculate the loan-to-value ratio,  which represents the proportion of the property’s value being financed by  the mortgage and is an indicator of its risk level. Real estate can be  valued using a number of methods, including appraisals, broker price  opinions (BPO), and automated valuation models (AVM). Appraisals—the  valuation method used in the large majority of mortgage transactions— are opinions of value based on market research and analysis as of a  specific date. Appraisals are performed by state-licensed or -certified  appraisers who are required to follow the Uniform Standards of  Professional Appraisal Practice (USPAP). A BPO is an estimate of the  probable selling price of a particular property prepared by a real estate  broker, agent, or sales person rather than by an appraiser. An AVM is a  computerized model that estimates property values using public record  data, such as tax records and information kept by county recorders,  multiple listing services, and other real estate records.
In 1986, the House Committee on Government Operations issued a  report concluding that problematic appraisals were an important  contributor to the losses that the federal government suffered during the  savings and loan crisis. The report states that hundreds of savings and loans chartered or insured by the federal government were severely  weakened or declared insolvent because faulty and fraudulent real estate  appraisals provided documentation for loans larger than justified by the  collateral’s real value. In response, Congress incorporated provisions in  Title XI of FIRREA that were intended to ensure that appraisals  performed for federally related transactions were done (1) in writing, in  accordance with uniform professional standards, and (2) by individuals  whose competency has been demonstrated and whose professional  conduct is subject to effective supervision.
Various private, state, and federal entities have roles in the Title XI  regulatory structure:
The Appraisal Foundation. The Appraisal Foundation is a private not- for-profit corporation composed of groups from the real estate industry  that works to foster professionalism in appraising. The foundation  sponsors two independent boards with responsibilities under Title XI.  The first of these, the Appraisal Standards Board, sets forth rules for  developing an appraisal and reporting its results through USPAP. Title  XI requires real estate appraisals performed in conjunction with  federally related transactions to follow USPAP. The second board, the  Appraiser Qualifications Board, establishes the minimum qualification  criteria for state certification and licensing of real property  appraisers. Title XI requires all state-licensed and -certified  appraisers to meet the minimum education, experience, and  examination requirements promulgated by the Appraiser  Qualifications Board. The foundation disseminates information  regarding USPAP and the appraiser qualification criteria, which are  periodically revised and updated, to state and federal regulators,  appraisers, users of appraisal services, and the general public. The  foundation is funded primarily by sales of publications but also  receives an annual grant from ASC.
State-level regulatory entities. Title XI relies on the states to (1)  implement the certification and licensing of all real estate appraisers  and (2) monitor and supervise appraisers’ compliance with appraisal  standards and requirements. To assure the availability of certified and  licensed appraisers, all 50 states, the District of Columbia, and four  U.S. territories have adopted structures to regulate and supervise the  appraisal industry. These structures typically consist of a state  regulatory agency coupled with a board or commission to establish  education and experience requirements (consistent with or in excess  of Appraiser Qualifications Board criteria), license and certify  appraisers, and monitor and enforce appraiser compliance. These  regulatory agencies generally oversee the activities of appraisers for  all types of transactions, including those that are federally related.
Federal financial institutions regulators. Title XI places responsibility  for regulating appraisals and “evaluations” performed in conjunction  with federally related transactions with the Federal Reserve, FDIC,  OCC, and NCUA. To meet this responsibility, these financial  institution regulators have established requirements for appraisals and  evaluations through regulations and have jointly issued Interagency  Appraisal and Evaluation Guidelines. Among other things,  appraisals for federally related transactions must, at a minimum,  provide an estimate of market value, conform to USPAP, be in writing,  and contain sufficient information and analysis to support the  institution’s decision to engage in the transaction. By regulation, loans  that qualify for sale to a U.S. government agency or U.S. government- sponsored agency and loans that are wholly or partially insured or  guaranteed by such agencies are exempt from the appraisal  requirements. In addition, loans that involve residential real estate  transactions in which the appraisal conforms to Fannie Mae or  Freddie Mac appraisal standards are exempt from these appraisal  requirements. Under authority granted by Title XI, the federal  regulators also have adopted regulations that exempt federally related  transactions of $250,000 or less from appraisal requirements,  meaning that the services of a licensed or certified appraiser are not  required (although an evaluation must be performed). The  regulations provide a similar appraisal exemption for real estate- secured business loans of $1 million or less that are not dependent on  the sale of, or rental income derived from, real estate as the primary  source of repayment. The regulations and guidelines also specify  the types of policies and procedures lenders should have in place to  help ensure independence and credibility in the valuation process.  Additionally, the federal regulators have developed procedures for  examining the real estate lending activities of regulated institutions  that include steps for assessing the completeness, adequacy, and  appropriateness of these institutions’ appraisal and evaluation policies  and procedures.
Appraisal Subcommittee. ASC has responsibility for monitoring the  implementation of Title XI by the private, state, and federal entities  discussed previously. Among other things, ASC is responsible for (1)  monitoring and reviewing the practices, procedures, activities, and  organizational structure of the Appraisal Foundation—including  making grants to the Foundation in amounts that it deems appropriate  to help defray costs associated with its Title XI activities; (2)  monitoring the requirements established by the states and their  appraiser regulatory agencies for the certification and licensing of  appraisers; (3) monitoring the requirements established by the federal  financial institutions regulators regarding appraisal standards for  federally related transactions and determinations of which federally  related transactions will require the services of state-licensed or - certified appraisers; and (4) maintaining a national registry of state- licensed and -certified appraisers who may perform appraisals in  connection with federally related transactions. Among other  responsibilities and authorities, the Dodd-Frank Act requires ASC to  implement a national appraiser complaint hotline and provides ASC  with limited rulemaking authority. ASC provides an annual report to  Congress on its activities and financial status in the preceding year.  For fiscal year 2010, ASC reported total expenses (including grants to  the Appraisal Foundation) of approximately $3.6 million.
Some 20 years after the passage of Title XI, questions remain about  oversight of the appraisal industry and the quality of appraisals. Although  the federal financial institutions regulators have had guidance since the  1990s to help ensure the independence of appraisers, during the mid- 2000s, some appraisers reported that loan officers and mortgage brokers  pressured them to overvalue properties to help secure mortgage  approvals. An investigation into allegations about a major lender’s role in  pressuring appraisers led to questions about what the enterprises, which  had purchased many of the lender’s mortgages, had done to ensure that  the appraisals for the mortgages met the enterprises’ requirements. A key  outcome of that investigation was the enterprises’ adoption of the Home  Valuation Code of Conduct (HVCC), which set forth appraiser  independence requirements for mortgages sold to the enterprises.  Although the Dodd-Frank Act declared HVCC no longer in effect, it  codified several of HVCC’s provisions, and the enterprises have  incorporated many of the other provisions into their requirements. As we  reported in July 2011, appraiser independence requirements and other  factors have increased the use of Appraisal Management Companies  (AMC). Some appraisal industry participants are concerned that some AMCs may prioritize low costs and quick completion of assignments over  appraiser competence, with negative consequences for appraisal quality.  Moreover, according to the FBI, appraisal fraud—the deliberate  overstatement or understatement of a home’s appraised value—is an  ongoing concern. Of the 817 mortgage fraud cases the FBI closed from  the fourth quarter of fiscal year 2010 through the third quarter of fiscal  year 2011, 92 involved appraisal fraud.
section_title: Several Weaknesses Have Potentially Limited ASC’s Effectiveness in Performing Its Title XI Functions
paragraphs: ASC has been performing its monitoring role under Title XI, but several  weaknesses have potentially limited its effectiveness. In particular, ASC  has not fully developed appropriate policies and procedures for  monitoring state appraiser regulatory agencies, the federal financial  institutions regulators, and the Appraisal Foundation. As part of its  monitoring role, ASC also maintains a national registry of appraisers,  which includes data on state disciplinary actions.
subsections: section_title: ASC Has Improved State Compliance Reviews, but Its Enforcement Tools and Reporting Procedures Have Been Limited
paragraphs: ASC has improved its reviews of state compliance with Title XI, but its  enforcement tools and procedures for reporting compliance levels have  been limited. ASC has detailed policies and procedures for monitoring  state appraiser regulatory programs and has issued 10 policy statements  covering different aspects of states’ implementation of Title XI  requirements. The policy statements cover topics including submission of  data to the national registry, license reciprocity (enabling an appraiser  certified or licensed in one state to perform appraisals in other states),  and programs for enforcing appraiser qualifications and standards. For  example, Statement 6 states that license reciprocity agreements should  contain certain characteristics, such as recognizing and accepting  successfully completed continuing education courses taken in the  appraiser’s home state. Statement 10 sets forth guidelines for enforcing  Appraiser Qualifications Board criteria for appraiser certification and  complaint resolution. The policy statements are designed to assist states  in continuing to develop and maintain appropriate organizational and  regulatory structures for certifying, licensing, and supervising real estate  appraisers. These statements reflect the general framework that ASC  uses to review a state’s program for compliance with Title XI. ASC staff  told us that they had initiated actions to update the policy statements to  reflect Appraisal Standards Board changes to USPAP, modifications to  Appraiser Qualifications Board criteria, emerging issues identified through  state compliance reviews, and provisions in the Dodd-Frank Act.
Apart from the policy statements, however, ASC has functioned without  regulations and enforcement tools that could be useful in promoting state  compliance with Title XI. Prior to the Dodd-Frank Act, Title XI did not give  ASC rulemaking authority and provided it with only one enforcement  option. ASC’s policy statements on specific elements of Title XI take the  form of policies rather than regulations, which may limit ASC’s leverage  over states that are not in compliance. As discussed later in this report,  the Dodd-Frank Act provides ASC with limited rulemaking authority. Prior  to the Dodd-Frank Act, the only enforcement action ASC could take under  Title XI was to “derecognize” a state’s appraiser regulatory program,  which would prohibit all licensed or certified appraisers from that state  from performing appraisals in conjunction with federally related  transactions. ASC has never derecognized a state, and ASC officials told  us that using this sanction would have a devastating effect on the real  estate markets and financial institutions within the state.
While ASC has until recently had limited enforcement tools, it has had a  number of tools to encourage state programs to comply with the policy  statements and therefore Title XI requirements (see table 1). ASC’s  primary tools for monitoring the states are routine and follow-up  compliance reviews, which are performed on site by ASC’s four Policy  Managers. These reviews are designed to encourage adherence to Title  XI requirements by identifying any instances of noncompliance or “areas  of concern” and recommending corrective actions. ASC conveys its  findings and recommendations to states through written reports.  Examples of areas covered by the reviews include timeliness in resolving  complaints about appraiser misconduct or wrongdoing; degree to which  education courses are consistent with Appraiser Qualifications Board  criteria; adequacy of state statutes and regulations on certifying and  licensing appraisers; timeliness and completeness of data submissions to  the national registry and remittance of national registry fees; and  validation of documentation supporting appraiser education and  experience.contact visits” on an as-needed basis and off-site monitoring performed  continuously.
section_title: Dodd-Frank Act Provides ASC New Authorities and Presents Implementation Challenges
subsections: section_title: The Dodd-Frank Act Expands ASC’s Role and Provides New Tools to Oversee State Appraiser Regulatory Agencies
paragraphs: The Dodd-Frank Act contains 14 provisions that give ASC a number of  new responsibilities and authorities. We identified 27 tasks associated  with these provisions, ranging from complex undertakings to more  straightforward administrative actions. Some of the more complex tasks  include establishing and maintaining a national appraisal complaint  hotline, making grants to state appraiser regulatory agencies, and  implementing new rulemaking authority and enforcement tools. The act  includes several other tasks such as encouraging states to accept  appraisal courses approved by the Appraiser Qualifications Board and to  establish policies for issuing reciprocal licenses or certifications to  qualified appraisers from other states. As of October 2011, ASC had  completed several tasks that required no rulemaking or creation of new  programs and was in various stages of progress on the others. Appendix  IV provides a summary of all 27 tasks and their status as of October  2011.
The Dodd-Frank Act requires ASC to determine whether a national  hotline exists that receives complaints of noncompliance with appraisal  independence standards and USPAP, including complaints from  appraisers, individuals, or other entities concerning the improper  influencing or attempted improper influencing of appraisers or the  appraisal process. ASC completed this task in January 2011, within the  statutory deadline, and reported that no such hotline currently existed.
The Dodd-Frank Act also requires ASC to establish and operate such a  national hotline, including a toll-free telephone number and an e-mail  address, if it determined that one did not already exist. Additionally, the  act requires ASC to refer hotline complaints to appropriate governmental  bodies for further action. ASC has not fully addressed this requirement  but has researched how other agencies operate hotlines and make  complaint referrals. ASC officials told us that the hotline would require  significant staff and funds and that they were exploring options for  implementing it, including hiring a contractor.
Appraisal industry stakeholders we spoke with identified a number of  potential challenges in establishing and operating a hotline. They noted  that creating and maintaining a hotline could be costly because it will  likely require investments in staff and information technology to fully  ensure that calls are properly received, screened, tracked, and referred to  appropriate regulatory agencies. Stakeholders indicated that screening  calls would be a critical and challenging task because frivolous  complaints could overwhelm the system and identifying valid complaints  would require knowledge of USPAP. Some stakeholders we spoke with  expressed concern about consumers using the hotline simply to report  disagreement with an appraiser’s valuation instead of to report USPAP  violations, concerns about appraiser independence, or potential fraud.  Some appraisers said that frivolous consumer complaints could hurt an  appraiser’s ability to get future appraisal assignments, while federal  financial regulatory officials said that frivolous complaints from appraisers  against lenders could lead to costly and time-consuming investigations.  Additionally, industry stakeholders noted that the hotline would only have  value if valid complaints were followed up and resolved but pointed out  that some states lack the resources to handle their existing volume of  complaints. Further, stakeholders said that deciding which regulatory  entities should receive complaint referrals could be difficult in some cases  and that differing state requirements for complaints (such as forms, procedures, and standards) could complicate the referral process.
Nonetheless, appraisal industry stakeholders told us they believed that  the hotline would offer several benefits. These included giving appraisers  a central place to report when they feel they are being pressured,  providing a conduit to forward complaints to appropriate entities,  promoting the development of more uniform complaint and complaint  follow-up procedures, and providing ASC with information that could be  useful for its state and appraiser enforcement efforts. Among the state  appraiser regulatory agencies we surveyed, views on establishing a  hotline varied. For example, 13 of the 50 states responded that the hotline  would improve their ability to regulate the appraisal industry in their state,  while 9 viewed it as a hindrance. Of the remaining 28 respondents, 13  thought it would neither help nor hinder, 12 did not know, 2 commented  on the potential for frivolous complaints, and 1 did not respond.
Additionally, 25 of the 50 states responded that the establishment of a  hotline would increase the number of complaints they received.
The Dodd-Frank Act requires ASC to make grants to state appraiser  regulatory agencies to support these agencies’ compliance with Title XI,  including processing and investigating complaints, enforcement activities,  and submission of data to the national registry. As previously noted,  timely investigation and resolution of complaints has been a persistent  problem for a number of states. Most of the state appraiser regulatory  agencies we surveyed expressed interest in applying for ASC grants once  the program is implemented. Specifically, 34 of the 50 states responding  to our survey indicated they would likely apply for a grant, while 8 said  they were unlikely to do so, and 3 said they were neither likely nor  unlikely to do so. States cited activities related to enforcement and  complaints—such as training for prosecutors and investigation of  complaints—as the most likely potential uses of grant funds. Other  potential uses cited by states included technological improvements for  submitting data to the national registry and hiring appraiser licensing staff.
While generally supportive of the grant program, appraisal industry  stakeholders and ASC officials we spoke with noted several potential  hurdles. Several stakeholders raised concerns about whether ASC had  adequate resources to fund grants or sufficient expertise in grant  administration and oversight. For example, officials from one appraisal  industry group noted that ASC’s grant resources could be spread thin if  numerous states apply and that states may not find small grants to be  worthwhile. ASC officials said they were unsure whether a planned  increase in the national registry fee—from $25 to $40 per appraiser  credential, effective January 2012—would be adequate to fund the grants  and oversee them, especially in light of recent declines in the number of  appraisers. They also indicated that they would likely need to hire a grants specialist and an accountant to properly administer the grant  program.
Additionally, appraisal industry stakeholders cited challenges that ASC  could face in designing the grant program and the decisions it will need to  make. Some noted the challenge of designing grant eligibility and award  criteria that (1) do not reward states that have weak appraiser regulatory  programs because they use appraisal-related fee revenues (from state  appraiser licensing and exam fees, for example) for purposes other than  appraiser oversight and (2) will not create incentives for states to use less  of their own resources for regulation of appraisers. They noted that  some states direct (or “sweep”) appraisal-related revenues into the state’s  general fund, which, in some cases may contribute to underfunding of the  state’s appraiser regulatory agency. Twenty-six of the 50 state agencies  that responded to our survey reported that their state government had the  authority to sweep revenues collected by the agency into the state’s  general fund, and 19 of these 26 indicated that their state had exercised   In addition, stakeholders had a range of views on what  this authority.the grant award criteria should include. For example, some suggested  flexible grants based on the number of complaints or the number of  appraisers in a state. However, others, including an ASC board member,  said that the grants should target specific, well-defined initiatives to help  ensure that funds are used appropriately. The board member pointed to  state investigator training funded through ASC grants to the Appraisal  Foundation as an example of such an initiative. States responding to our  survey identified other possible funding criteria, including the extent to  which a state had established appropriate performance benchmarks and  the state’s past efforts to address compliance deficiencies.
The Dodd-Frank Act also gives ASC the authority to prescribe regulations  in four areas: temporary practice, the national registry, information  sharing, and enforcement. For purposes of prescribing regulations, the act requires ASC to establish an advisory committee of industry  participants, including appraisers, lenders, consumer advocates, real  estate agents, and government agencies, and hold meetings as  necessary to support the development of regulations. Although ASC  already has policy statements covering the four areas, appraisal industry  stakeholders and ASC officials indicated that regulations could be  expected to strengthen ASC’s leverage over states to comply with Title  XI. In addition, ASC officials noted that rulemaking authority would allow  them to establish mandatory state reporting requirements and provide  them additional administrative options to address state noncompliance.  However, as of October 2011, ASC had not established an advisory  committee or drafted any regulations. ASC officials told us that these  tasks were still in the early planning stage.
In addition to the rulemaking authority, the Dodd-Frank Act expands  ASC’s enforcement tools. As previously discussed, ASC’s only  enforcement option prior to the act was derecognition of a state’s  appraiser regulatory program. The act gives ASC the authority to remove  a state-licensed or -certified appraiser or a registered AMC from the  national registry on an interim basis, not to exceed 90 days, pending state  agency action on licensing, certification, registration, and disciplinary  proceedings. It also authorizes ASC to impose (unspecified) interim  actions and suspensions against a state agency as an alternative to, or in   Many appraisal industry  advance of, the derecognition of the agency.stakeholders we spoke with supported ASC’s new authorities because  they will allow ASC to take a more flexible, targeted approach to  enforcement.
ASC has yet to implement these authorities and will face a number of  decisions and challenges in doing so. ASC officials told us they would use  their new rulemaking authority to promulgate regulations for removing an  appraiser from the national registry. As part of the rulemaking, ASC  officials said they plan to develop criteria for circumstances that warrant  removal as well as due process procedures. Several appraisers we spoke  with stressed the importance of having a process that will allow them to   Officials from state bank  defend themselves prior to a removal action.regulatory agencies told us that ASC may face challenges in collecting  sufficient documentary evidence to justify removing an appraiser from the  national registry because evidence collection is resource intensive. ASC  officials said that determining the interim actions and suspensions they  would take against state agencies also would be done through  rulemaking, which can be a time-consuming process. Officials from  several state appraiser regulatory agencies said that for such actions to  be effective, they should be directed to higher levels of state government  because the agencies have limited authority to make resource decisions  or implement major changes. For example, some state appraiser  regulatory agencies report to other agencies that control budget and  policy decisions.
section_title: ASC Faces Resource Challenges and Is Developing a Strategic Plan
paragraphs: ASC confronts the challenge of implementing the tasks associated with  the Dodd-Frank Act with limited resources. As previously noted, ASC has  a small staff and, in recent years, its revenues have declined while its  expenses have grown. ASC has 10 staff members, including an  Executive Director, a Deputy Executive Director, a General Counsel, 4  Policy Managers, an Information Management Specialist, and 2  Administrative Officers.
ASC’s revenues—which come exclusively from national registry fees— rose (in nominal dollars) from $2.2 million in fiscal year 2000 to a peak of  $3.2 million in fiscal year 2007 but declined to $2.8 million in fiscal year  2010 (see fig. 3). According to ASC officials, revenue from registry fees  allowed ASC to carry out its Title XI responsibilities and accumulate  approximately $6 million in reserves by fiscal year 2008. However, since  2007, the number of appraiser credentials in the registry has declined  each year, causing ASC’s revenues to shrink. Pursuant to a Dodd-Frank  Act provision, ASC increased its registry fee from $25 to $40 (a 60  percent increase) effective January 2012, which will likely increase ASC’s  revenues. However, because the number of appraisers has been  declining—by about 9.4 percent from 2007 through 2010—the fee  increase may not result in a proportional rise in revenue. To illustrate,  ASC’s revenue in 2014 would be about $4.4 million if the number of  appraiser credentials stayed at 2010 levels but would be about $4.0  million if the number of appraiser credentials fell by another 9.4 percent  from 2011 through 2014. Although the Dodd-Frank Act also authorized  ASC to collect registry fees from AMCs, revenues from this source may  not be available for several years because regulations for AMC  registration must be developed and implemented first.
As shown in figure 3, ASC’s total expenses in nominal dollars increased  from $2.2 million in fiscal year 2000 to $3.6 million in fiscal year 2010.  ASC’s total expenses include operating expenses and grants to the  Appraisal Foundation, both of which rose over that period. Operating  expenses grew from $1.3 million in fiscal year 2000 to $2.3 million in  fiscal year 2010, primarily due to an increase in personnel and  administrative costs for conducting more frequent state compliance  reviews. Grants to the Appraisal Foundation grew from $916,000 in fiscal  year 2000 to $1.3 million in fiscal year 2010, partly to fund state  investigator training courses. In fiscal years 2009 and 2010, ASC’s  expenses exceeded its revenues by $380,581 and $782,046,  respectively. ASC used reserve funds to cover these amounts, reducing  the reserve to $4.8 million by the end of fiscal year 2010.
In light of these resource and implementation challenges, ASC officials  began developing a strategic plan in May 2011 that encompasses both its  existing activities and its new responsibilities and authorities under the  Dodd-Frank Act. ASC also developed a more limited project plan that  focuses specifically on tasks and milestones stemming from the act.  According to an ASC board member, ASC did not previously have a  strategic plan, due partly to stability in its functions over the years. The  board member said that the new responsibilities contained in the Dodd- Frank Act prompted them to undertake a full strategic planning effort.  ASC officials told us that they hoped to complete the plan by the end of  2011.
ASC officials told us that their strategic plan would include a mission  statement and goals but did not provide specific information about the  expected contents of their plan. Although ASC is not subject to the GPRA  Modernization Act of 2010 (GPRAMA)—which amends the Government  Performance and Results Act of 1993 (GPRA)—ASC officials told us that   GPRAMA  their plan would include GPRAMA’s general components.provides federal agencies with an approach to focusing on results and  improving government performance by, among other things, developing  strategic plans. Examples of GPRAMA plan components include a  comprehensive agency mission statement; general goals and objectives,  including outcome-oriented goals; and a description of how the goals and  objectives are to be achieved, including the processes and resources  required.
section_title: Most Recent Mortgages Were Below the Threshold for Appraisal Exemption, and Stakeholder Views on the Threshold Vary
paragraphs: Our analysis of HMDA data found that approximately 71 percent of first- lien mortgages for single-family (one- to four-unit) homes originated from  calendar years 2006 through 2009 were less than or equal to $250,000— the regulatory threshold at or below which appraisals are not required for  federally related transactions. As shown in figure 4, the percentage  varied little by origination year, ranging from a low of 69 percent in 2006  to a high of 73 percent in 2008. For all four years combined, 41 percent  of the mortgages were $150,000 or less, and 30 percent were from  $150,001 to $250,000. For the same 4-year period, we found that about  22 percent of mortgages for residential multifamily structures were at or  below the $250,000 threshold, as were about 98 percent of mortgages for  manufactured housing.
The proportions of mortgages originated from 2006 through 2009 that  were below the threshold varied considerably by state. The percentage of  first-lien mortgages for single-family homes that were less than or equal  to $250,000 ranged from a low of 32 percent in California and Hawaii to a  high of 95 percent in North Dakota. Two states, New Mexico and South  Carolina, represented the median percentage of 82 percent (see fig. 5.)  The only places in which more than half of the mortgage originations were  greater than $250,000 were California, the District of Columbia, and  Hawaii. In states that experienced some of the steepest declines in house  prices during the 4 years we examined, the proportion of annual  mortgage originations that fell below the threshold increased substantially  over the period. For example, the proportion rose 25 percentage points in  Nevada, 17 percentage points in California, and 8 percentage points in  both Arizona and Florida.
Despite the sizable proportion of residential mortgages at or below  $250,000, the threshold has had limited impact in recent years on the  percentage of mortgages with an appraisal because mortgage lenders,  investors, and insurers generally require them for mortgages, regardless  of amount. Due to the sharp contraction of the private mortgage market  that began in 2007, the large majority of mortgage originations are  currently purchased or insured by the enterprises and HUD’s Federal  Housing Administration (FHA), which require appraisals on most  mortgages. In 2010, enterprise-backed mortgages accounted for more  than 65 percent of the market and FHA-insured mortgages accounted for  about 20 percent.
As we reported in July 2011, data for the two  enterprises combined showed that they required appraisals for 85 percent  of the mortgages they bought in 2010 and 94 percent of the mortgages  they bought in 2009 that were underwritten using their automated  underwriting systems. FHA requires appraisals for all of the home  purchase mortgages and most of the refinance mortgages it insures.  Furthermore, lender valuation policies may exceed investor or insurer  requirements in some situations. For example, lender risk-management  policies may require the lender to obtain an appraisal even when the  enterprises do not, or the lender may obtain an appraisal to better ensure  that the mortgage complies with requirements for sale to either of the  enterprises.
The $250,000 threshold could become more consequential if the roles of  the enterprises and FHA are scaled back in the future. The administration  and Congress are considering options that would diminish the federal role  in mortgage finance and help transition to a more privatized market by  winding down the enterprises and reducing the size of FHA. If this were  to occur, the proportion of mortgage originations not subject to the  appraisal requirements of these entities could increase. If private  investors and insurers were to impose less stringent appraisal  requirements than the enterprises or FHA, more mortgages of $250,000  or less may not receive an appraisal. However, whether the private  market will require appraisals for mortgages below the threshold is  unclear at this time.
subsections: section_title: Appraisal Industry Stakeholders Have Differing Views on Revising the Exemption Thresholds
paragraphs: The perspectives of appraisal industry stakeholders we spoke with— including appraisers, lenders, and federal and state regulators—did not  provide a consensus view on whether or how the $250,000 threshold or  the $1 million threshold that applies to real estate-secured business loans  should be revised. Although no stakeholders advocated higher  thresholds, a number recommended lowering or eliminating them, while  others thought no changes were necessary. In addition, some  stakeholders suggested alternatives to fixed, national dollar thresholds.
Appraiser industry groups, lending industry representatives, and some of  the state regulators we contacted said that the appraisal exemption  thresholds should be lower, in part to help manage the risk assumed by  lending institutions. For example, 14 of the 50 state appraiser regulatory  agencies that responded to our survey indicated that the $250,000  threshold should be lowered to either $50,000 or $100,000. Several of the  parties we spoke with pointed out that the median sales price of homes in  the United States is below $250,000, which exempts numerous mortgage  transactions from regulatory appraisal requirements. An NCUA official  noted that in large numbers, smaller home mortgages or business loans  can pose the same risks to lending institutions as larger ones, so smaller  loans should not necessarily be exempt from appraisal requirements.  Additionally, appraisal industry stakeholders indicated that “evaluations”  that may be performed as an alternative to an appraisal may include  methods that are less credible and reliable, such as AVMs. These  stakeholders acknowledged that while appraisal requirements are  currently driven by the enterprises and FHA, the roles of these entities  could change.
Additionally, while appraisals for residential mortgages are not intended to  validate the purchase price of the property in question, some  stakeholders believe that they serve a consumer protection function by  providing objective information about the market value of a property that  consumers can use in making buying decisions. One appraisal industry  representative said this information can help homebuyers avoid  immediately owing more on a property than the property is worth, a  situation that can make resale or refinancing difficult or cost-prohibitive.  The Dodd-Frank Act requires that any revisions to the $250,000 threshold  take into account consumer protection considerations through the  concurrence of CFPB.
Other appraisal industry stakeholders, including some state appraiser and  bank regulatory officials, felt that the appraisal thresholds should remain  where they are. For example, 17 of the 50 state appraiser regulatory  agencies that responded to our survey indicated that the $250,000  threshold should not be changed. A few of these stakeholders stated that  lowering the threshold would potentially require more homebuyers to pay  for appraisals, which are generally more expensive than other valuation  methods. For example, according to mortgage industry participants, a  typical appraisal can cost a consumer $300 to $450 on average, while a  property valuation by an AVM can cost $5 to $25. appraisal industry participant said that lower thresholds could subject  more real estate-related transactions for which an appraisal is not  necessary to appraisal requirements. For example, he indicated that  when the property in question is collateral for a loan that is much less  than the probable value of the property, a cheaper and faster valuation  method such as an AVM may be sufficient. An FDIC official said it was  not clear that the exemption thresholds needed to be revised and noted  that even for transactions below the thresholds, regulated financial  institutions are expected to have a risk-based approach that determines  when they will use an appraisal versus another method.
Some appraisal industry stakeholders said that changes in real estate  market conditions and variation in housing markets argued for thresholds  tied to median property values at the state or regional level. For example,  some of the respondents to our state survey noted that a national  $250,000 threshold is largely irrelevant in some areas of the country. As  previously shown in figure 5, in several states, over 90 percent of recent  mortgages were $250,000 or less. Some stakeholders felt that the  thresholds should not be based solely on the loan amount and should  include other factors that affect credit risk, such as the borrower’s debt  burden.
Appraisal costs can vary considerably depending on the location and size of the  property, among other factors. See GAO-11-653.
section_title: Conclusions
paragraphs: The critical role of real estate appraisals in mortgage underwriting  underscores the importance of effective regulation of the appraisal  industry. Title XI of FIRREA created a complex regulatory structure that  relies upon the actions of many state, federal, and private entities to help  ensure the quality of appraisals and the qualifications of appraisers used  in federally related transactions. ASC performs an important function  within that structure by, among other things, monitoring the requirements  and activities of some of the key entities—state appraiser regulatory  agencies, the federal financial institutions regulators, and the Appraisal  Foundation. Although ASC is carrying out its monitoring function, it has  not developed appropriate policies and procedures for some of its  activities, potentially limiting its effectiveness. First, ASC could improve  how it assesses and reports on states’ overall compliance with Title XI.  Specifically, developing and disclosing clear definitions of the compliance  categories could help ensure consistent and transparent application of the  categories and provide more useful information to Congress about states’  implementation of Title XI. Second, ASC could better delineate its role in  monitoring the appraisal requirements of the federal financial institutions  regulators and thereby strengthen accountability for this function. Third,  ASC could enhance its policies for determining which Appraisal  Foundation activities are eligible for grants to help ensure consistent  funding decisions and improve the transparency of the grant process.  Addressing these areas would also improve ASC’s compliance with  federal internal control standards designed to promote the effectiveness  and efficiency of agency operations.
Provisions in the Dodd-Frank Act will help ASC carry out its Title XI  monitoring functions but will also create challenges that will require  effective long-term planning. The limited rulemaking and enhanced  enforcement authorities the act provides to ASC address prior  weaknesses in its ability to promote states’ compliance with Title XI.  Implementing these authorities will involve significant follow-on steps,  including drafting regulations and developing criteria and processes to  remove problem appraisers from the national registry. Other tasks  stemming from the Dodd-Frank Act, such as establishing an appraiser  hotline and a state grant program, require resources and involve difficult  decisions. ASC is facing these tasks at a time when its costs have been  increasing, and its revenues from national registry fees have fallen  because of a decline in the number of appraisers. To help address these  challenges, ASC has for the first time undertaken a strategic planning  process. Although this process was not far enough along for us to  examine the details of ASC’s plan, setting goals and identifying processes  and resources necessary to achieve them could help ASC align its new  responsibilities with its mission and aid in resource allocation decisions.
section_title: Recommendations for Executive Action
paragraphs: To help ensure effective implementation of ASC’s Title XI and Dodd- Frank Act responsibilities and improve compliance with federal internal  control standards, we recommend that the Chairman of ASC direct the  ASC board and staff to take the following three actions:  clarify the definitions used to categorize states’ overall compliance  with Title XI and include them in ASC’s compliance review and policy  and procedures manuals, compliance review reports to states, and  annual reports to Congress; develop specific policies and procedures for monitoring the appraisal  requirements of the federal financial institutions regulators and include  them in ASC’s policy and procedures manual; and develop specific criteria for assessing whether the grant activities of  the Appraisal Foundation are Title XI-related and include these criteria  in ASC’s policy and procedures manual.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to ASC, CFPB, FDIC, the Federal  Reserve, FHFA, HUD, NCUA, and OCC for their review and comment.  We received written comments from the Chairman, ASC; the Assistant  Director for Mortgage Markets, CFPB; the Executive Director, NCUA; and  the Acting Comptroller of the Currency, which are reprinted in appendixes  V through VIII. We also received technical comments from FDIC, the  Federal Reserve, and OCC, which we incorporated where appropriate.  FHFA and HUD did not provide comments on the draft report.
In their written comments, ASC, NCUA, and OCC agreed with our  recommendations. ASC noted that it had already taken preliminary  actions to address our recommendations and would consider the report’s  findings as it continues to implement its new authority under the Dodd- Frank Act. OCC also acknowledged the challenges ASC faces in  implementing its new responsibilities and authority under the act.
CFPB neither agreed nor disagreed with our recommendations but said  that the report provided a comprehensive analysis of ASC’s role and  highlighted resource and operating constraints that may challenge ASC’s  ability to implement its new duties under the Dodd-Frank Act. CFPB also  noted that if federal regulators contemplate revising the $250,000  appraisal exemption threshold, CFPB would evaluate whether the  proposed change would provide reasonable protection for homebuyers.  Additionally, CFPB indicated that it hoped to designate an ASC board  member in the near future and that, in the meantime, CFPB serves on the  ASC board in an advisory capacity.
We are sending copies of this report to the appropriate congressional  committees, the Chairman of ASC, the Chairman of FFIEC, the Chairman  of FDIC, the Chairman of the Federal Reserve, the Acting Director of  FHFA, the Secretary of Housing and Urban Development, the Chairman  of NCUA, the Acting Comptroller of the Currency, the Director of the  Bureau of Consumer Financial Protection, and other interested parties. In  addition, the report is available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IX.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) requires GAO to examine the Appraisal Subcommittee’s (ASC)  ability to carry out its functions, as well as related issues, including  regulatory exemptions to appraisal requirements, state disciplinary  actions against appraisers, and the extent to which a national appraisal  repository would benefit ASC. Our objectives were to examine (1) how  ASC is performing its functions under Title XI of the Financial Institutions  Reform, Recovery, and Enforcement Act of 1989 (FIRREA) that existed  prior to the passage of the Dodd-Frank Act, (2) ASC’s plans and actions  to implement provisions in the Dodd-Frank Act, and (3) analysis and  stakeholder views on existing dollar-based exemptions to appraisal  requirements for federally related transactions. For the first objective and  for information that appears in appendix II, we also examined the number  of state-licensed and -certified appraisers, as of December 31, 2010, and  the number of disciplinary actions that states took against appraisers from  2001 through 2010. Finally, for information that appears in appendix III,  we examined the views of appraisal industry stakeholders on the potential  benefits and challenges of a national appraisal repository for ASC.
subsections: section_title: ASC’s Title XI Functions Prior to the Dodd-Frank Act
paragraphs: To determine how ASC is performing its Title XI functions that existed  prior to the passage of the Dodd-Frank Act, we reviewed Title XI of  FIRREA and its legislative history. We reviewed ASC’s policies and  procedures, including its rules of operation, policy and procedures  manual, policy statements, compliance review manual, bulletins, and  notices. We consulted GAO’s Standards for Internal Control in the  Federal Government and Internal Control Management and Evaluation  Tool to assess ASC’s policies and procedures.
We reviewed a wide range of ASC reports and records relating to each of  ASC’s functions. With respect to ASC’s monitoring of states, we reviewed  reports on ASC’s compliance reviews of states from 2007 through 2010,  state response letters to compliance reviews, and summary statistics in  ASC’s annual reports to Congress on the results of compliance reviews.  We analyzed this information to determine how often ASC reviewed  states, the type and frequency of noncompliance problems ASC  identified, and the number of states in each of three overall compliance  categories (“in substantial compliance,” “not in substantial compliance,”  and “not in compliance”). We identified states that ASC reviewed at least  twice from 2007 through 2010 to determine any changes in these states’  overall compliance levels over that period. Regarding ASC’s monitoring of  the federal financial institutions regulators, we reviewed ASC board  minutes from 2003 through 2010, ASC’s annual reports to Congress for  those years, and a 2007 internal review of ASC’s operations, which  addressed this monitoring responsibility. With respect to ASC’s  monitoring of the Appraisal Foundation, we reviewed foundation grant  proposals, statements of work, and reimbursement requests from 2003  through 2010; ASC decisions on grant proposals and reimbursement  requests for that period; agreed-upon procedures reviews of the  foundation from 2005 through 2010 by an independent auditing firm; and  miscellaneous correspondence between ASC and the foundation. We  also reviewed ASC’s annual reports to Congress and board meeting  minutes from 2003 through 2010 to obtain information about the  foundation’s activities and ASC’s monitoring process. Regarding the  national registry, we analyzed selected information from ASC’s national  registry database, including the number of active appraiser credentials by  type and state as of December 31, 2010, and the number and types of  disciplinary actions against appraisers that states took and reported from  calendar years 2001 through 2010. To assess the reliability of the registry  data, we (1) reviewed information related to data elements, system  operations, and controls; (2) performed electronic testing for obvious  errors in accuracy and completeness; and (3) interviewed ASC officials  knowledgeable about the data. We concluded that the data elements we  used were sufficiently reliable for our purposes.
In addition to our document review and data analysis, we interviewed  current ASC staff, including the Executive Director, Deputy Executive  Director, and General Counsel, as well as a former ASC General  Counsel. We also interviewed ASC board members, which, at the time of  our fieldwork, included officials from the Federal Deposit Insurance  Corporation (FDIC), Board of Governors of the Federal Reserve System  (Federal Reserve), Federal Housing Finance Agency (FHFA),  Department of Housing and Urban Development (HUD), National Credit  Union Administration (NCUA), Office of the Comptroller of the Currency  (OCC), and Office of Thrift Supervision (OTS). We also interviewed  officials from the Federal Financial Institutions Examination Council  (FFIEC); representatives of the Appraisal Foundation; state appraisal  regulatory officials; and a range of other appraisal industry participants  and stakeholders, including trade groups that represent appraisers and  lenders, officials from the government-sponsored enterprises Fannie Mae  and Freddie Mac (the enterprises), and officials from the Federal Bureau  of Investigation (FBI).
Finally, to support this objective and our other reporting objectives, we  conducted a Web-based survey of appraiser regulatory agencies from the  50 states, the District of Columbia, and the U.S. territories of Guam,  Northern Mariana Islands, Puerto Rico, and the Virgin Islands. During  May 2011, we conducted four telephone pretests of the survey instrument  with officials from different state regulatory agencies. The pretest results  were incorporated into the survey questions as warranted. We fielded the  survey to officials from the 55 state and territorial regulatory agencies on  June 7, 2011. The survey had a closing deadline of July 8, 2011. Fifty of  the 55 agencies completed the survey; the remaining five either did not  start or did not finish the survey. Among other things, the survey collected  information on how the state and territorial agencies carry out their Title  XI responsibilities (including submitting data to the national registry and  following up on complaints against appraisers); agency funding and  staffing issues; and state views on ASC, appraisal-related provisions in  the Dodd-Frank Act, and the $250,000 appraisal exemption threshold.  The results are contained in an e-supplement to this report that includes  the questions asked and a summary of the answers provided. View the e- supplement at GAO-12-198SP.
section_title: Implementation of Dodd- Frank Act Provisions
paragraphs: To describe ASC’s plans and actions to implement Dodd-Frank Act  provisions, we reviewed pertinent sections of the act and analyzed ASC  records and other documents that described specific tasks stemming from  the act and ASC’s progress in addressing them. These records and  documents included ASC board meeting minutes, ASC Dodd-Frank Act  summaries and implementation timelines, and Federal Register notices.  We also interviewed ASC board members and staff about progress and  challenges in implementing these tasks. To gain perspective on ASC’s  resources for implementing the Dodd-Frank Act provisions, we reviewed  information from ASC’s annual reports and financial statements. More  specifically, we examined the number and responsibilities of ASC’s staff  positions and ASC’s revenues, expenses, and reserves from fiscal years  2001 through 2010. In addition, we estimated ASC’s fee revenues in 2014  under two scenarios. The first assumed no change in the number of  appraiser credentials after 2010, and the second assumed a 9.4 percent  drop after 2010 (mirroring the decline that occurred from 2007 through  2010). To examine ASC’s strategic planning efforts, we interviewed ASC  board members and staff about their planning process and time frames.  We also reviewed the GPRA Modernization Act (GPRAMA), which  provides a framework for federal agency’s strategic plans.
section_title: Dollar-Based Appraisal Exemption Thresholds
paragraphs: To examine existing dollar-based appraisal exemption thresholds, we  analyzed data from FFIEC’s Home Mortgage Disclosure Act (HMDA)  database and obtained stakeholder opinions about the thresholds. HMDA  requires lending institutions to collect and publicly disclose information  about housing loans and applications for such loans, including the loan  type and amount, property type, and borrower characteristics. These data  are the most comprehensive source of information on mortgage lending  and are estimated to capture about 75 to 85 percent of conventional  mortgages (those without government insurance or guarantees) and 90 to  95 percent of mortgages insured by HUD’s Federal Housing  Administration. Lenders with small total assets and lenders that do not  have a home or branch office in a metropolitan statistical area do not  have to report HDMA data. We analyzed HMDA data from 2006 through  2009 to determine the proportion of mortgages less than or equal to  $250,000—the regulatory threshold at or below which appraisals are not  required for federally related transactions.purchase and refinance mortgages for single-family (one-to-four unit) site-  We focused primarily on  built residences. At the national level and for each state, we calculated  the proportion of these mortgages that were $250,000 or less by year of  origination and for all 4 years combined. In addition, for each state, we  calculated the change in the proportion of mortgages at or below the  $250,000 threshold from 2006 through 2009. Using FHFA’s purchase- only house price index, we also examined the extent to which states with  large increases in the proportion of mortgages at or below the threshold  also experienced large house price declines over the 4-year period. We  analyzed mortgages for residential multifamily housing (five or more units)  and manufactured housing separately and at the national level only.  Specifically, we calculated the proportions of these mortgages that were  at or below the $250,000 threshold, combining data for 2006 through  2009. Due to a lack of readily available data, we were not able to perform  a similar analysis for real estate-secured business loans, which have an  appraisal exemption threshold of $1 million or less. To assess the data  reliability of the HMDA data we used, we reviewed documentation on the  process used to collect and ensure the reliability and integrity of the data;  reviewed Federal Reserve and HUD analysis of the data’s market  coverage; conducted reasonableness checks on data elements to identify  any missing, erroneous, or outlying data; and spoke with officials from the  Federal Reserve and the Bureau of Consumer Financial Protection (also  known as the Consumer Financial Protection Bureau or CFPB)  knowledgeable about the data. We concluded that the data we used were  sufficiently reliable for our purposes.
To provide perspective on the impact of the $250,000 threshold, we relied  on information in a report we issued in July 2011, which included  information on the proportion of residential mortgage originations from  2006 through 2010 that had appraisals. In that report, we indicated that  the enterprises and the Federal Housing Administration (FHA) have  commanded a large share of the mortgage market in recent years and  that these entities require appraisals on the large majority of the  mortgages they back, both above and below $250,000.
To obtain stakeholder views on the $250,000 and $1 million thresholds,  we interviewed ASC board members and staff; officials from the federal  financial institutions regulators, FHFA, HUD, and CFPB; and  representatives from the Appraisal Foundation and state appraiser  regulatory agencies. We also interviewed other appraisal industry  participants, including trade groups that represent appraisers and lenders  and officials from the enterprises. Additionally, we drew on the results of  our state survey, which included questions about the $250,000 threshold.
section_title: National Appraisal Repository
paragraphs: To obtain stakeholder views about whether new means of data collection,  such as the establishment of a national appraisal repository, might assist  ASC in carrying out its responsibilities, we interviewed ASC board  members and staff; officials from federal financial institutions regulators,  CFPB, FBI, FHFA, HUD, and the enterprises; representatives of the  Appraisal Foundation; and state appraiser regulatory officials. We also  interviewed representatives of trade groups that represent appraisers and  lenders, as well as individual mortgage lenders, appraisers, and appraisal  industry researchers.
We conducted this performance audit from November 2010 to January  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Data on the Number of Appraiser Credentials and State Enforcement Actions Against Appraisers
paragraphs: ASC’s national registry of state-licensed and -certified appraisers contains  information on four classes of appraiser credentials: certified general,  certified residential, licensed, and transitionally licensed. As of December  31, 2010, the database reported nearly 110,000 active appraiser  credentials. The number of appraiser credentials reported by state  appraiser regulatory agencies ranged from 8 in the Northern Mariana  Islands to 13,050 in California (see table 3.) Nationwide, certified general  and certified residential appraiser credentials accounted for about 84  percent of the total appraiser credentials.
As previously noted, the national registry contains information on  disciplinary actions taken and reported by state regulators. Table 4  summarizes this information for calendar years 2001 through 2010.
section_title: Appendix III: Potential Benefits and Challenges of a National Appraisal Repository for ASC
paragraphs: The Dodd-Frank Act asked us to examine whether new means of data  collection, such as the establishment of a national repository of appraisal  information, would benefit ASC’s ability to perform its functions. We spoke  with a range of appraisal industry stakeholders, including appraisers,  lenders, regulators, and ASC officials about what a national repository  might contain, its potential benefits and challenges, and the extent to  which it would help ASC carry out its responsibilities.
The Dodd-Frank Act does not specify the information that a national  appraisal repository would contain if one were to be created. Appraisal  industry stakeholders we spoke with identified a number of possibilities,  ranging from a compilation of scanned appraisal reports to a searchable  database of appraisal information such as the location and characteristics  of the subject property, name of the appraiser and mortgage lender,  appraised value, and properties used as “comparables.” Some  stakeholders indicated that a repository could potentially be linked to  other data such as geographic information (e.g., digital maps), mortgage  and borrower characteristics (e.g., status of mortgage payments), and  housing market and economic statistics (e.g., local sales activity and  rental and vacancy rates). Stakeholders said that multiple listing services  and other proprietary databases contain some of this information.
While the potential uses of a repository would depend on who had access  to it, appraisal industry stakeholders identified a variety of benefits that a  repository could provide. Some indicated that a repository could help  regulators detect problematic appraisals and appraisers. For example,  knowing the entities associated with every appraisal (e.g., appraiser,  appraisal management company, and lender) could help regulators  identify patterns of questionable behavior by individuals or firms.  Additionally, the ability to view appraisals of the same property over time  and appraisals for nearby properties could help regulators identify outliers  (i.e., unusually high or low values) that may merit further investigation.  Appraisers also could benefit from a repository by having access to  additional data with which to perform their valuations. For example, one  ASC board member said a repository that included the selling price of the  comparables used in each appraisal would give appraisers access to  sales information in states where such data are not publicly disclosed. In  addition, industry stakeholders indicated that an appraisal repository  could be integrated with mortgage portfolio information to help manage  financial risk—for example, by assessing relationships between appraisal  quality and loan performance. The government-sponsored enterprises  Fannie Mae and Freddie Mac (the enterprises) have undertaken a joint  effort, under the direction of FHFA that illustrates this concept. Known as  the Uniform Mortgage Data Program (UMDP), this effort will collect  consistent appraisal and loan data for all mortgages the enterprises  purchase from lenders and will produce a proprietary dataset for use by  the enterprises and FHFA. According to officials from the enterprises,  UMDP will allow the enterprises to work with lenders to resolve any  concerns regarding appraisal quality prior to purchasing mortgages.
While a repository could provide some benefits, appraisal industry  stakeholders also identified a number of challenges related to data  collection and analysis, access rights, and resources. For example, they  indicated that reporting of appraisal data would need to be more  standardized for the repository to be useful. They also said questions  exist about the extent to which appraisal reports are proprietary and could  be included in a database that would potentially be widely accessible.  Some stakeholders said analyzing data in a repository would not be  straightforward because potential differences in the scope of work for  each appraisal (e.g., an interior and exterior inspection versus an exterior  inspection only) would complicate comparison of appraisal results.  Additionally, some stakeholders expressed concerns about who would  have access to the repository and whether broad access would encroach  upon the privacy of appraisers. Further, a number of stakeholders and  ASC officials said that a national repository could be very costly to create  and maintain. They indicated that ASC was not the appropriate agency to  develop a repository because it lacks the necessary resources. Some  stakeholders also said that development of a repository would partially  duplicate the enterprises’ efforts under UMDP.
Appraisal industry stakeholders and ASC officials questioned how much a  national repository would help ASC carry out its monitoring  responsibilities. They said that the high-level nature of ASC’s monitoring  responsibilities did not require detailed information on individual  appraisals. For example, ASC officials said it was unclear how a  repository would help them monitor states’ appraiser regulatory programs,  a process that involves examining state appraiser licensing and  certification requirements and assessing their compliance with Title XI.  Other industry stakeholders said they were not sure how ASC could use a  repository because ASC is not charged with assessing appraisal quality  or proactively identifying individual appraisers or institutions responsible  for problem appraisals. Additionally, one appraisal industry participant  noted that analyzing information from a repository could require expertise  and resources that ASC may not currently have.
section_title: Appendix IV: Status of ASC Tasks Stemming from the Dodd-Frank Act
paragraphs: Subtitle F, Section 1473 of the Dodd-Frank Act, includes amendments to  Title XI of FIRREA. These amendments expand ASC’s responsibilities  and authorities. We identified 27 tasks for ASC stemming from the Dodd- Frank Act provisions. A description and the status of each task as of  October 2011 is presented in the table below.
section_title: Appendix V: Comments from the Appraisal Subcommittee
section_title: Appendix VI: Comments from the Consumer Financial Protection Bureau
section_title: Appendix VII: Comments from the National Credit Union Administration
section_title: Appendix VIII: Comments from the Office of the Comptroller of the Currency
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steve Westley, Assistant  Director; Alexandra Martin-Arseneau; Yola Lewis; John McGrail; Marc  Molino; Carl Ramirez, Kelly Rubin; Jerome Sandau; Jennifer Schwartz;  Andrew Stavisky; and Jocelyn Yin made key contributions to this report.