Residential Appraisals: Regulators Should Take Actions to Strengthen Appraisal Oversight
Published: 2012-06-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Real estate valuations, which encompass appraisals and other estimation methods, have come under increased scrutiny in the wake of the recent mortgage crisis. The Dodd-Frank Act codified several independence requirements for appraisers and requires federal regulators to set standards for registering AMCs. Additionally, the act expanded the role of ASC, which oversees the appraisal regulatory structure established by Title XI of FIRREA. The act also directed GAO to conduct two studies on real estate appraisals. This testimony discusses information from those studies, including (1) the use of different real estate valuation methods, (2) policies on appraiser conflict-of-interest and selection and views on their impact, and (3) ASCs performance of its Title XI functions. To address these objectives, GAO analyzed government and industry data; reviewed academic and industry literature; examined policies, regulations, and professional standards; and interviewed industry participants and stakeholders.
section_title: What GAO Found
paragraphs: Data GAO obtained from Fannie Mae and Freddie Mac (the enterprises) and five of the largest mortgage lenders indicate that appraisalswhich provide an estimate of market value at a point in timeare the most commonly used valuation method for first-lien residential mortgage originations. Other methods, such as broker price opinions and automated valuation models, are quicker and less costly but are viewed as less reliable. As a result, they generally are not used for most purchase and refinance mortgage originations. Although the enterprises and lenders GAO spoke with did not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approachin which the value is based on recent sales of similar propertiesis required by the enterprises and the Federal Housing Administration. This approach is reportedly used in nearly all appraisals.
Conflict-of-interest policies have changed appraiser selection processes and the appraisal industry more broadly, raising concerns about the oversight of appraisal management companies (AMC), which often manage appraisals for lenders. Recent policies, including provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), reinforce prior requirements and guidance that restrict who can select appraisers and prohibit coercion. In response to market changes and these requirements, some lenders have turned to AMCs. Greater use of AMCs has raised questions about oversight of these firms and their impact on appraisal quality. Federal regulators and the enterprises said they hold lenders responsible for ensuring that AMCs policies and practices meet their requirements but that they generally do not directly examine AMCs operations. Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence. The Dodd-Frank Act requires state appraiser licensing boards to supervise AMCs and requires the federal banking regulators, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection to establish minimum standards for states to apply in registering them. Setting minimum standards that address key functions AMCs perform on behalf of lenders could provide greater assurance of the quality of the appraisals that AMCs provide. As of June 2012, federal regulators had not completed rulemaking to set state standards.
The Appraisal Subcommittee (ASC) has been performing its monitoring role under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), but several weaknesses have potentially limited its effectiveness. For example, ASC has not clearly defined the criteria it uses to assess states overall compliance with Title XI. In addition, Title XI charges ASC with monitoring the appraisal requirements of the federal banking regulators, but ASC has not defined the scope of this functionfor example, by developing policies and proceduresand its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related. Not having appropriate policies and procedures is inconsistent with federal internal control standards that are designed to promote the effectiveness and efficiency of federal activities.
section_title: What GAO Recommends
paragraphs: GAO previously recommended that federal regulators consider key AMC functions in rulemaking to set minimum standards for registering these firms. The regulators agreed with or said they would consider this recommendation. GAO also recommended that ASC clarify the criteria it uses to assess states compliance with Title XI and develop specific policies and procedures for monitoring the federal banking regulators and the Appraisal Foundation. ASC is taking steps to implement these recommendations. See G AO-11-653 and GAO-12-147 .

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on residential real  estate valuations and the role of the Appraisal Subcommittee (ASC) of  the Federal Financial Institutions Examination Council (FFIEC) in  monitoring requirements for real estate appraisals and appraisers. Real  estate valuations, which encompass appraisals and other value  estimation methods, play a critical role in mortgage underwriting by  providing evidence that the market value of a property is sufficient to help  mitigate losses if the borrower is unable to repay the loan. However,  turmoil in the mortgage market raised questions about mortgage  underwriting practices, including the quality and credibility of some  valuations. An investigation into industry appraisal practices by the New  York State Attorney General led to an agreement in 2008 between the  Attorney General, Fannie Mae and Freddie Mac (the enterprises), and the  Federal Housing Finance Agency (FHFA), which regulates the  enterprises, that included the Home Valuation Code of Conduct (HVCC).  HVCC set forth certain appraiser independence requirements for loans  sold to the enterprises and took effect in 2009. Although the Dodd-Frank  Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)  declared HVCC no longer in effect, it codified several of HVCC’s  provisions. The Dodd-Frank Act also amended Title XI of the Financial  Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA),  which made reforms to address the quality of appraisals and appraiser  qualifications and created ASC to monitor Title XI’s implementation.  Among other things, the Dodd-Frank Act gave ASC additional  responsibilities and authorities.
The Dodd-Frank Act also directed us to perform two studies concerning  real estate appraisals. The first, which we issued in July 2011, included  an examination of real estate valuation methods, including appraisals,  and conflict-of-interest and appraiser-selection policies. The second,  which we issued in January 2012, included an assessment of ASC’s  monitoring functions and discussed challenges that ASC faces in  implementing its new responsibilities and authorities.
My statement today is based on information from those two reports.  Specifically, I will discuss (1) the use of different valuation methods for  single-family residential mortgages and the advantages and  disadvantages of each method, (2) policies on appraiser conflict-of- interest and selection and views on the policies’ impact on industry  stakeholders and appraisal quality; and (3) ASC’s performance of its Title  XI functions that existed prior to the Dodd-Frank Act and challenges that it  faces in implementing additional responsibilities under the act. To do this  work, we analyzed proprietary data we obtained from the enterprises,  lenders, and a mortgage technology company on the use of different  valuation methods and appraisal approaches. We reviewed academic and industry literature on real estate valuation and examined federal  regulations and policies, as well as lenders’ and appraisal management  companies’ (AMC) internal policies on and procedures for selecting  appraisers.its rules of operation, policy and procedures manual, Title XI policy  statements, and compliance review manual. In addition, we reviewed  ASC records such as its annual reports to Congress, board-meeting  minutes, state compliance review reports, and grant documents. We  interviewed a broad range of appraisal and mortgage industry participants  and stakeholders, including officials from the enterprises, FHFA, the  federal banking regulatory agencies, and ASC. Additionally, prior to this  hearing, we interviewed federal regulators to update the status of our  recommendations. The work that this statement is based on was  performed from July 2010 to June 2012 in accordance with generally  accepted government auditing standards. Those standards require that  we plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Background
paragraphs: Before originating a residential mortgage loan, a lender assesses its risk  through the underwriting process, in which the lender generally examines  the borrower’s credit history and capacity to repay the mortgage and  obtains a valuation of the property that will be the loan’s collateral.  Lenders need to know the property’s market value, or the probable price  that the property should bring in a competitive and open market, in order  to provide information for assessing their potential loss exposure if the   Real estate can be valued using a number of  borrower defaults.methods, including appraisals, broker price opinions (BPO), and  automated valuation models (AVM). Appraisals are opinions of value  based on market research and analysis as of a specific date. Appraisals  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  salesperson rather than by an appraiser. An AVM is a computerized  model that estimates property values using public record data, such as  tax records and information kept by county recorders, multiple listing  services, and other real estate records.
In 1986, the House Committee on Government Operations issued a  report concluding that problematic appraisals were an important  contributor to the losses that the federal government suffered during the  savings and loan crisis. The report stated that hundreds of savings and  loans chartered or insured by the federal government were severely  weakened or declared insolvent because faulty and fraudulent real estate  appraisals provided documentation for loans larger than what the  collateral’s real value justified. In response, Congress incorporated  provisions in Title XI of FIRREA that were intended to ensure that  appraisals performed for federally related transactions were done (1) in  writing, in accordance with uniform professional standards, and (2) by  individuals whose competency had been demonstrated and whose  professional conduct was subject to effective supervision.
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 rules for  developing an appraisal and reporting its results through USPAP. The  second board, the Appraiser Qualifications Board, establishes the  minimum qualification criteria for state certification and licensing of  real property appraisers.of publications but also receives an annual grant from ASC.
Evaluations are estimates of market value that do not have to be performed by a state- licensed or -certified appraiser. The federal banking regulators permit evaluations to be  performed (consistent with safe and sound lending practices) in certain circumstances,  such as mortgage transactions of $250,000 or less that are conducted by regulated  institutions. for assessing the completeness, adequacy, and appropriateness of  these institutions’ appraisal and evaluation policies and procedures.
Appraisal Subcommittee. ASC has responsibility for monitoring the  implementation of Title XI by the private, state, and federal entities  noted previously. Among other things, ASC is responsible for (1)  monitoring and reviewing the practices, procedures, activities, and  organizational structure of the Appraisal Foundation—including  making grants to the Foundation in amounts that it deems appropriate  to help defray costs associated with its Title XI activities; (2)  monitoring the requirements that states and their appraiser regulatory  agencies establish for the certification and licensing of appraisers; (3)  monitoring the requirements established by the federal banking  regulators regarding appraisal standards for federally related  transactions and determinations of which federally related  transactions will require the services of state-licensed or -certified  appraisers; and (4) maintaining a national registry of state-licensed  and -certified appraisers who can perform appraisals for federally  related transactions. Among other responsibilities and authorities, the  Dodd-Frank Act requires ASC to implement a national appraisal  complaint hotline and provides ASC with limited rulemaking authority.  To carry out these tasks, ASC has 7 board member positions and 10  staff headed by an Executive Director hired by the board. Five of the  board members are designated by the federal agencies that are part  of FFIEC—the Bureau of Consumer Financial Protection (also known  as the Consumer Financial Protection Bureau or CFPB), FDIC, the  Federal Reserve, NCUA, and OCC. The other two board members  are designated by the U.S. Department of Housing and Urban  Development (HUD)—which includes the Federal Housing  Administration (FHA)—and FHFA. ASC is funded by appraiser  registration fees that totaled $2.6 million in fiscal year 2011.
section_title: The Widespread Use of Appraisals for Mortgage Originations Reflects Their Advantages Relative to Other Valuation Methods
paragraphs: Available data and interviews with lenders and other mortgage industry  participants indicate that appraisals are the most frequently used  valuation method for home purchase and refinance mortgage  originations. Appraisals provide an opinion of market value at a point in  time and reflect prevailing economic and housing market conditions. Data  provided to us by the five largest lenders (measured by dollar volume of  mortgage originations in 2010) show that, for the first-lien residential  mortgages for which data were available, these lenders obtained  appraisals for about 90 percent of the mortgages they made in 2009 and  2010, including 98 percent of home purchase mortgages. The data we  obtained from lenders included mortgages sold to the enterprises and  mortgages insured by FHA, which together accounted for the bulk of the  mortgages originated in 2009 and 2010. The enterprises and FHA require  appraisals to be performed for a large majority of the mortgages they  purchase or insure. For mortgages for which an appraisal was not done,  the lenders we spoke with reported that they generally relied on validation  of the sales price (or loan amounts in the case of refinances) against an  AVM-generated value, in accordance with enterprise policies that permit  this practice for some mortgages that have characteristics associated with  a lower default risk.
The enterprises, FHA, and lenders require and obtain appraisals for most  mortgages because mortgage industry participants consider appraising to  be the most credible and reliable valuation method, for a number of  reasons. Most notably, appraisals and appraisers are subject to specific  requirements and standards. In particular, USPAP outlines the steps  appraisers must take in developing appraisals and the information  appraisal reports must contain. It also requires that appraisers follow  standards for ethical conduct and have the competence needed for a  particular assignment. Furthermore, state licensing and certification  requirements for appraisers include minimum education and experience  criteria, and standardized report forms provide a way to report relevant  appraisal information in a consistent format.
In contrast, other valuation methods such as BPOs and AVMs are not  permitted for most purchase and refinance mortgage originations. The  enterprises do not permit lenders to use BPOs for mortgage originations  and permit lenders to use AVMs for only a modest percentage of  mortgages they purchase. Additionally, the federal banking regulators’  guidelines state that BPOs and AVMs cannot be used as the primary  basis for determining property values for mortgages originated by  regulated institutions. However, the enterprises and lenders use BPOs  and AVMs in a number of circumstances other than purchase and  refinance mortgage originations because these methods can provide a  quicker, less expensive means of valuing properties in active markets.
When performing appraisals, appraisers can use one or more of three  approaches to value—sales comparison, cost, and income. The sales  comparison approach compares and contrasts the property under  appraisal with recent offerings and sales of similar properties. The cost  approach is based on an estimate of the value of the land plus what it  would cost to replace or reproduce the improvements minus depreciation.  The income approach is an estimate of what a prudent investor would pay  based upon the net income the property produces. USPAP requires  appraisers to consider which approaches to value are applicable and  necessary to perform a credible appraisal and provide an opinion of the  market value of a particular property. Appraisers must then reconcile the  values produced by the different approaches they use to reach a value  conclusion.
The enterprises and FHA require that, at a minimum, appraisers use the  sales comparison approach for all appraisals because it is considered the  most applicable for estimating market value in typical mortgage  transactions. Consistent with these policies, our review of valuation data  from a mortgage technology company—representing about 20 percent of  mortgage originations in 2010—indicated that appraisers used the sales  comparison approach for nearly all (more than 99 percent) of the  mortgages covered by these data. The cost approach, which was  generally used in conjunction with the sales comparison approach, was  used somewhat less often—in approximately two-thirds of the  transactions in 2009 and 2010, according to these data. The income  approach was rarely used. Some mortgage industry stakeholders have  argued that wider use of the cost approach in particular could help  mitigate what they viewed as a limitation of the sales comparison  approach. They told us that relying solely on the sales comparison  approach could lead to market values rising to unsustainable levels and  that using the cost approach as a check on the sales comparison  approach could help lenders and appraisers identify when this is  happening. For example, they pointed to a growing gap between average  market values and average replacement costs of properties as the  housing bubble developed in the early to mid-2000s. However, other  mortgage industry participants noted that a rigorous application of the  cost approach might not generate values much different from those  generated using the sales comparison approach. They indicated, for  example, that components of the cost approach—such as land value or  profit margins of real estate developers—could grow rapidly in housing  markets where sales prices are increasing. The data we obtained did not  allow us to analyze the differences between the values appraisers  generated using the different approaches.
section_title: Conflict-of-Interest Policies Have Changed Appraiser Selection Processes, with Implications for Appraisal Oversight
paragraphs: Recently issued policies reinforce long-standing requirements and  guidance designed to address conflicts of interest that may arise when  direct or indirect personal interests bias appraisers from exercising their  independent professional judgment. In order to prevent appraisers from  being pressured, the federal banking regulators, the enterprises, FHA,  and other agencies have regulations and policies governing the selection  of, communications with, and coercion of appraisers. Examples of  recently issued policies that address appraiser independence include the  now-defunct HVCC, which took effect in May 2009; the enterprises’ new  appraiser independence requirements that replaced HVCC in October  2010; provisions in the Dodd-Frank Act; and revised Interagency  Appraisal and Evaluation Guidelines from the federal banking regulators  that were issued in December 2010. Provisions of these and other  policies address (1) prohibitions against the involvement of loan  production staff in appraiser selection and supervision; (2) prohibitions  against third parties with an interest in the mortgage transaction, such as  real estate agents or mortgage brokers, selecting appraisers; (3) limits on  communications with appraisers; and (4) prohibitions against coercive  behaviors.
According to mortgage industry participants, HVCC and other factors  have contributed to changes in appraiser selection processes—in  particular, to lenders’ more frequent use of AMCs to select appraisers.  AMCs are third parties that, among other things, select appraisers for  appraisal assignments on behalf of lenders. Some appraisal industry  participants said that HVCC, which required additional layers of  separation between loan production staff and appraisers for mortgages  sold to the enterprises, led some lenders to outsource appraisal functions  to AMCs because they thought using AMCs would allow them to easily  demonstrate compliance with these requirements. In addition, lenders  and other mortgage industry participants told us that market conditions,  including an increase in the number of mortgages originated during the  mid-2000s and lenders’ geographic expansion over the years, put  pressure on lenders’ capacity to manage appraisers and led to their  reliance on AMCs.
Greater use of AMCs has raised questions about oversight of these firms  and their impact on appraisal quality. Direct federal oversight of AMCs is  limited. Federal banking regulators’ guidelines for lenders’ own appraisal  functions list standards for appraiser selection, appraisal review, and  reviewer qualifications. The guidelines also require lenders to establish  processes to help ensure that these standards are met when lenders  outsource appraisal functions to third parties, such as AMCs. Officials  from the federal banking regulators told us that they reviewed lenders’  policies and controls for overseeing AMCs, including the due diligence  performed when selecting AMCs. However, they told us that they  generally did not review an AMC’s operations directly unless they had  serious concerns about it that the lender was unable to address. In  addition, a number of states began regulating AMCs in 2009, but the  regulatory requirements vary and provide somewhat differing levels of  oversight, according to officials from several state appraiser regulatory  boards.
Some appraiser groups and other appraisal industry participants have  expressed concern that existing oversight may not provide adequate  assurance that AMCs are complying with industry standards. These  participants suggested that the practices of some AMCs for selecting  appraisers, reviewing appraisal reports, and establishing qualifications for  appraisal reviewers—key areas addressed in federal guidelines for  lenders’ appraisal functions—may have led to a decline in appraisal  quality. For example, appraiser groups said that some AMCs selected  appraisers based on who would accept the lowest fee and complete the  appraisal report the fastest rather than on who was the most qualified,  had the appropriate experience, and was familiar with the relevant  neighborhood. AMC officials we spoke with said that they had processes  that addressed these areas of concern—for example, using an automated  system that identified the most qualified appraiser based on the  requirements for the assignment, proximity to the subject property, and  performance metrics such as timeliness and appraisal quality.
While the impact of the increased use of AMCs on appraisal quality is  unclear, Congress recognized the importance of additional AMC oversight  in enacting the Dodd-Frank Act by requiring state appraiser regulatory  boards to supervise AMCs. The Dodd-Frank Act requires the federal  banking regulators, CFPB, and FHFA to establish minimum standards for  states to apply in registering AMCs, including requirements that  appraisals coordinated by an AMC comply with USPAP and be conducted  independently and free from inappropriate influence and coercion. This  rulemaking provides a potential avenue for reinforcing existing federal  requirements for key functions that may impact appraisal quality, such as  selecting appraisers, reviewing appraisals, and establishing qualifications  for appraisal reviewers. Such reinforcement could help to provide greater  assurance to lenders, the enterprises, and federal agencies of the quality  of the appraisals provided by AMCs.
To help ensure more consistent and effective oversight of the appraisal  industry, we recommended in our July 2011 report that the heads of the  federal banking regulators, CFPB, and FHFA—as part of their joint  rulemaking required under the Dodd-Frank Act—consider including  criteria for the selection of appraisers for appraisal orders, review of  completed appraisals, and qualifications for appraisal reviewers when  developing minimum standards for state registration of AMCs. federal banking regulators and FHFA agreed with or indicated that they  would consider our recommendation but as of June 2012 had not issued  a rule setting minimum standards for state registration of AMCs.
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 banking  regulators, and the Appraisal Foundation. In addition, ASC faces potential  challenges in implementing some Dodd-Frank Act provisions.
subsections: section_title: Monitoring States’ Compliance with Title XI
paragraphs: GAO-11-653. national registry of appraisers, license reciprocity (which enables an  appraiser certified or licensed in one state to perform appraisals in other  states), and programs for enforcing appraiser qualifications and  standards. ASC primarily uses on-site reviews conducted by ASC staff to  monitor states’ compliance with the policy statements. ASC’s routine  compliance reviews examine each state every 2 years or annually if ASC  determines that a state needs closer monitoring. These reviews are  designed to encourage adherence to Title XI requirements by identifying  any instances of noncompliance or “areas of concern” and recommending  corrective actions. ASC conveys its findings and recommendations to  states through written reports. In 2010, ASC reported 34 findings of  noncompliance, the majority of which concerned weaknesses in state  enforcement efforts, such as a lack of timeliness in resolving complaints  about appraiser misconduct or wrongdoing. At the completion of each  review, ASC executive staff and board members deliberate on the  findings and place the state into one of three broad compliance  categories: “in substantial compliance,” “not in substantial compliance,”  and “not in compliance.” According to ASC, in substantial compliance  applies when there are no issues of noncompliance or no violations of  Title XI; not in substantial compliance applies when there are one or more  issues of noncompliance or violations of Title XI that do not rise to the  level of not in compliance; and not in compliance applies when “the  number, seriousness, and/or repetitiveness of the Title XI violations  warrant this finding.”
We found that ASC had been using the three compliance categories in its  reports to states and annual reports to Congress (which provide  aggregate statistics on the number of states in each category). However,  it had not included the definitions of the categories in these reports or in  its compliance review manual or policy and procedures manual, and its  definition of “not in compliance” was not clear or specific. As previously noted, the definition states only that the category is to be used “when the  number, seriousness, and/or repetitiveness of the violations warrant this  finding” and does not elaborate on how these factors are weighed or  provide examples of situations that would meet this definition. These  shortcomings are inconsistent with our internal control standards, which  state that federal agencies should have appropriate policies and  procedures for each of their activities. Without clear, disclosed  definitions, ASC limits the transparency of the state compliance review  process and the usefulness of information Congress receives to assess  states’ implementation of Title XI. Further, by not incorporating the  definitions into its compliance review and policy and procedures manuals,  ASC increases the risk that board members and staff may not interpret  and apply the compliance categories in a consistent manner. To address  these shortcomings, we recommended in our January 2012 report that  ASC clarify the definitions it uses to categorize states’ overall compliance  with Title XI and include these definitions in ASC’s compliance review and  policy and procedures manuals, compliance review reports to states, and  annual reports to Congress. In June 2012, ASC officials told us that they  had developed a revised system for rating states that included five  compliance categories (ranging from excellent to poor), each with specific  criteria. They said that they would soon be publishing the compliance  categories in the Federal Register to obtain public comments and would  include the final categories in appropriate manuals and reports.
In addition to this procedural weakness, ASC has functioned without  regulations and enforcement tools that could be useful in promoting state  compliance with Title XI. Prior to the Dodd-Frank Act, Title XI did not give  ASC rulemaking authority and provided it with only one enforcement  option—”derecognition” of a state’s appraiser regulatory program. This  action would prohibit all licensed or certified appraisers from that state  from performing appraisals in conjunction with federally related  transactions. ASC has never derecognized a state, and ASC officials told  us that using this sanction would have a devastating effect on the real  estate markets and financial institutions within the state. The Dodd-Frank  Act provides ASC with limited rulemaking authority and authorizes ASC to  impose (unspecified) interim actions and suspensions against a state  agency as an alternative to, or in advance of, the derecognition of the  agency. As of June 2012, ASC had not implemented this new  enforcement authority. ASC officials said that determining the interim  actions and suspensions they would take against state agencies would be  done through future rulemaking.
section_title: Monitoring the Appraisal Requirements of the Federal Banking Regulators
paragraphs: Although Title XI charges ASC with monitoring the appraisal requirements  of the federal banking regulators, ASC has not developed policies and  procedures for carrying out this responsibility. While ASC’s policy manual  provides detailed guidance on monitoring state appraiser regulatory  programs, it does not mention any activities associated with monitoring  the appraisal requirements of the federal banking regulators. Further,  ASC officials acknowledged the absence of a formal monitoring process.  The absence of policies and procedures specifying monitoring tasks and  responsibilities limits accountability for this function and is inconsistent  with federal internal control standards designed to help ensure  effectiveness and efficiency in agency operations.
According to ASC officials, ASC performs this monitoring function through  informal means, primarily through its board members who are employed  by the federal banking regulators. However, minutes from ASC’s monthly  board meetings and ASC’s annual reports to Congress indicate that the  monitoring activities of ASC as a whole have been limited. For example,  our review of board-meeting minutes from 2003 through 2010 found no  instances of the board discussing the appraisal requirements of the  federal financial regulators.function in ASC’s annual reports is limited to a summary of any new  appraisal requirements issued by the federal financial regulators and  HUD during the preceding year.
Additionally, evidence of this monitoring  Stakeholder views differ as to how to interpret the Title XI requirement  that ASC monitor the requirements established by the federal banking  regulators with respect to appraisal standards. Specifically, some ASC  board members told us that they understand their monitoring role as  maintaining an awareness of the federal financial regulators’ appraisal  requirements. Further, one ASC board member told us that ASC’s  monitoring of the federal financial regulators was more limited than its  monitoring of states because (1) board members from the federal  financial regulatory agencies are knowledgeable of the appraisal  requirements of their agencies, (2) the federal regulators’ interagency  process for developing appraisal guidelines (in place since 1994) has  reduced the need for monitoring the consistency of guidelines across  agencies, and (3) monitoring the states’ appraiser requirements requires  in-depth review of state processes for licensing, certification, and  enforcement.
ASC adopted some of the report’s recommendations, such as creating a Deputy  Executive Director position and allowing states to respond to preliminary compliance  review findings prior to the issuance of final reports. and noted that ASC’s annual reports did not provide substantive analysis  or critique of federal appraisal requirements.
However, appraisal industry stakeholders also noted that implementing a  more expansive interpretation of ASC’s monitoring role would pose  challenges. For example, existing ASC staff may not have the capacity to  take on additional monitoring responsibilities. Even if ASC staff were able  to independently analyze the federal regulators’ appraisal requirements,  the analysis would be subject to review by the ASC board, which,  because of its composition, is not independent from the agencies that  ASC is charged with monitoring.
To better define the scope of its monitoring role and improve the  transparency of its activities, we recommended in our January 2012  report that ASC develop specific policies and procedures for monitoring  the appraisal requirements of the federal banking regulators. In June  2012, ASC officials told us that they recognized the need for ASC to  perform this monitoring function, were deliberating on ways to carry it out,  and expected to have policies and procedures in place later in the year.
section_title: Monitoring the Appraisal Foundation’s Grant Activities
paragraphs: As previously noted, the Appraisal Foundation is a private not-for-profit  corporation that sponsors independent boards that set standards for  appraisals and minimum qualification criteria for appraisers. ASC  approves an annual grant proposal and provides monthly grant  reimbursements to the Appraisal Foundation to support the Title XI- related activities of the foundation and its Appraisal Standards Board and  Appraiser Qualifications Board. The reimbursements cover the  foundation’s incurred costs for activities under the grant. From fiscal years  2000 through 2010, ASC provided the foundation over $11 million in grant  reimbursements, or about 40 percent of ASC’s expenditures over that  period.
Although ASC monitors the foundation in several ways, ASC lacks  specific policies and procedures for determining whether grant activities  are related to Title XI. ASC’s policies and procedures manual does not  address how ASC monitors the Appraisal Foundation. Instead, ASC uses  monitoring procedures contained in a memorandum prepared by a former  Executive Director. The memorandum describes how the Executive  Director reviewed the foundation’s grant activities but does not provide  criteria for deciding what is Title XI-related. When we asked current ASC  officials for the criteria they used, they indicated only that ASC staff  “review submissions from the Foundation and supporting cost  spreadsheets to determine that activities proposed in the annual grant  request or the monthly reimbursement processes meet the requirements  of Title XI.” They said that once staff determine whether or not a  submission falls within these parameters, they make a recommendation  to the ASC board. However, determinations about what activities are Title  XI-related are not always clear-cut. For example, in 2003, the Executive  Director at the time recommended that the foundation be reimbursed for  certain legal expenses in connection with a complaint filed with the  foundation’s ethics committee. However, the ASC board rejected the  reimbursement request because the expenses “were not sufficiently Title  XI-related.” ASC’s records do not indicate what criteria either the  Executive Director or the ASC board used as a basis for their decisions or  why they disagreed. Similarly, our review of ASC documents for more  recent grants found no supporting explanations for decisions about  whether grant activities were Title XI-related. One ASC board member  said the board had a common understanding of what activities were  eligible for grants but acknowledged that the basis for funding decisions  could be better documented. As previously noted, our internal control  standards state that federal agencies should have appropriate policies for  each of their activities. Without policies that contain specific criteria, ASC  increases the risk that its grant decisions will be inconsistent, limits the  transparency of its decisions, and lacks assurance that it is complying  with federal internal control standards. To address this limitation, we  recommended that ASC develop specific criteria for assessing whether  the grant activities of the Appraisal Foundation were related to Title XI   In  and include these criteria in ASC’s policy and procedures manual.June 2012, ASC officials told us that they had been developing these  criteria and planned to finalize them by August 2012.
section_title: Implementing Dodd-Frank Act Provisions
paragraphs: The Dodd-Frank Act contains 14 provisions that give ASC a number of  new responsibilities and authorities. Some of the tasks associated with  these provisions are complex and challenging, especially for a small  agency with limited resources. One of the more complex tasks for ASC is  to establish a national appraisal complaint hotline and refer hotline  complaints to appropriate governmental bodies for further action.
Appraisal industry stakeholders we spoke with noted that creating and  maintaining a hotline could be costly because it will likely require  investments in staff and information technology to fully ensure that calls  are properly received, screened, tracked, and referred. Stakeholders  indicated that screening calls would be a critical and challenging job  because frivolous complaints could overwhelm the system and identifying  valid complaints would require knowledge of USPAP.
Another complex task for ASC is providing grants to state appraiser  regulatory agencies to support these agencies’ compliance with Title XI.  Appraisal industry stakeholders cited challenges that ASC could face in  designing the grant program and the decisions it will need to make. Some  noted the challenge of designing grant eligibility and award criteria that (1)  do not reward states that have weak appraiser regulatory programs  because they use appraisal-related fee revenues (from state appraiser  licensing and examination fees, for example) for purposes other than  appraiser oversight and (2) will not create incentives for states to use less  of their own resources for regulation of appraisers. In addition, ASC  officials said they were unsure whether a January 2012 increase in the  national registry fee—from $25 to $40 per appraiser credential—would be  adequate to fund the grants and oversee them, especially in light of  recent declines in the number of appraisers.
As of June 2012, ASC had not implemented either the national hotline or  the state grant program but had completed some initial steps. For  example, ASC officials told us that they had developed initial protocols for  handling hotline complaints and had begun work on a complaint form,  website, and call center. In addition, ASC is in the process of hiring a  grants manager.
Chairman Biggert, Ranking Member Gutierrez, and Members of the  Subcommittee, this concludes my prepared statement. I am happy to  respond to any questions you may have at this time.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact me at (202) 512- 8678 or shearw@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Key contributors to this testimony include Steve  Westley (Assistant Director), Don Brown, Marquita Campbell, Emily  Chalmers, Anar Ladhani, Yola Lewis, Alexandra Martin-Arseneau, John  McGrail, Erika Navarro, Carl Ramirez, Kelly Rubin, Jerry Sandau,  Jennifer Schwartz, Andrew Stavisky, and Jocelyn Yin.
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