Regulatory Programs:

Opportunities to Enhance Oversight of the Real Estate Appraisal Industry

GAO-03-404: Published: May 14, 2003. Publicly Released: May 14, 2003.

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David G. Wood
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Since the passage of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the appraisal and mortgage lending industry has changed dramatically. Some have concluded that the law is obsolete because the problems Title XI was intended to address--the risk to federal deposit insurance funds and the lack of uniform standards and qualifications--no longer exist. Others argue that the law's purpose and scope should be expanded. To help Congress better understand these issues, GAO looked at the roles of the private, state, and federal entities that oversee the appraisal industry, the challenges Title XI presented to these entities, and industry participants' concerns about the effectiveness of the Title XI regulatory structure.

Title XI created a complex oversight structure for real estate appraisals and appraisers that involves private, state, and federal entities. Two private entities establish uniform rules for real estate appraisals and set minimum criteria for certifying appraisers. State regulatory agencies certify appraisers based on these criteria. The federal financial regulators oversee financial institutions' use of appraisals, and a federal agency, the Appraisal Subcommittee, monitors and coordinates the functions of the parties involved in regulating appraisals and appraisers. All of these entities except the federal financial regulators identified potential impediments to carrying out their Title XI responsibilities. The two private entities stated that fund limitations could impede their ability to ensure that development of standards and qualifications evolve with changing conditions. State agencies said that funding shortfalls hindered their ability to enforce compliance. Appraisal Subcommittee staff reported that rule-making authority and additional enforcement sanctions could facilitate its oversight of state compliance with Title XI. Industry participants raised concerns about aspects of the Title XI regulatory system for appraisers. They cited differences in state regulation that affect both lenders and appraisers, gaps in Title XI's coverage--for example, transactions of less than $250,000 do not require an appraisal--high fees and burdensome processes for having appraiser education courses approved, and weak enforcement and complaints processing. Some industry participants felt that states, traditionally involved in regulating professions, alone should regulate the appraisal industry. Others felt that the current structure needed a significant overhaul to become effective.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: During the later part of 2003, the Appraisal Subcommittee (ASC) considered various possibilities to address this recommendation. At its December 2003 meeting, ASC directed staff to develop a more formalized method of weighing compliance with Title XI. ASC staff reviewed past field review reports to identify areas of concern and to design a rating system applicable to these areas. ASC staff proposed a 3-point based evaluation for each area--satisfactory, needs improvement, or unsatisfactory. The cumulative results of the application of this approach in a state field review would determine how the ASC would rank the state's Title XI compliance and whether it would fall into Tier 1, 2, or 3 (all other states). ASC staff field tested two drafts of a state rating system and presented it to ASC management in early 2005. ASC management was dissatisfied with the predictive results. ASC staff modified the rating plan following the 2005 presentation to the ASC Board. After applying the revised rating plan to a number of states during field reviews and evaluating the predictability of the ratings, ASC determined that the ratings were not adequately predictive. However, ASC has incorporated several of the concepts used in the rating plan approach (e.g., satisfactory, needs improvement, unsatisfactory) and has standardized the opening paragraph of its letter to states so that each letter contains one of the following three conclusions in the opening paragraph: (1) In Substantial Compliance; (2) Not in Substantial Compliance; and (3) Not in Compliance. ASC has developed specific guidance that it applies in determining which of these three summary statements are applicable to the state. That guidance addresses areas such as: no violations, but best practices recommendations; one or more violations of Title XI, but of a "minor" nature and not repetitive; the number, seriousness, and/or repetitiveness of the violations. ASC believes that this approach works effectively and allows it to carry out its mission as directed by Title XI.

    Recommendation: To improve its monitoring of the implementation of Title XI, the Chairman of the Appraisal Subcommittee should develop and apply consistent criteria for determining and reporting states' compliance levels with Title XI requirements.

    Agency Affected: Federal Financial Institutions Examination Council: Appraisal Subcommittee

  2. Status: Closed - Not Implemented

    Comments: ASC is not taking specific action on this recommendation and plans to continue its existing practices to assist states. Specifically, the executive director reiterated its position that it lacks legal authority to provide funding. ASC notes that it has provided non-financial assistance through participation in workshops, encourages states to pool resources, referred states to states that might provide assistance, and has discussed funding/resource issues in field review letters (FRL). ASC added that in some instances, an FRL has helped a state program obtain resources.

    Recommendation: To improve its monitoring of the implementation of Title XI, the Chairman of the Appraisal Subcommittee should explore potential options for funding or otherwise assisting states in carrying out their Title XI activities, particularly the investigation of complaints against appraisers.

    Agency Affected: Federal Financial Institutions Examination Council: Appraisal Subcommittee

  3. Status: Closed - Implemented

    Comments: ASC's decision regarding this issue is that it will consider each Foundation grant request on a case-by-case basis. At its September and December 2003 meetings, ASC approved the Foundation's grant request in its entirety ($901,465) even though the approval would cause ASC to operate at a loss for fiscal year 2004, if the budget is fully executed. In effect, ASC approved using the necessary funds from its surplus to fund fully the Foundation's 2004 grant request.

    Recommendation: To improve its monitoring of the implementation of Title XI, the Chairman of the Appraisal Subcommittee should explore alternatives for providing future grant funding, including drawing on its surplus if necessary, to the Appraisal Foundation and its two boards in support of their Title XI activities.

    Agency Affected: Federal Financial Institutions Examination Council: Appraisal Subcommittee

  4. Status: Closed - Not Implemented

    Comments: According to the Appraisal Subcommittee's (ASC) Executive Director, it attempted to convene a meeting in October 2003. The Association of Appraiser Regulatory Officials (AARO) was holding its Fall meeting in D.C. Due to scheduling conflicts, they were unable to convene the meeting. Freddie Mac, to the ASC staff's knowledge, has never referred appraisal-related complaints to the states. It was the ASC staff's understanding that Fannie Mae has ceased referring complaints. ASC staff subsequently met with state regulatory officials and discussed this issue at the Fall 2004 Association of Appraiser Regulatory Officials conference. During the conference, state representatives expressed satisfaction with HUD referrals and noted that Fannie Mae has not submitted any additional referrals. ASC considers this issue closed unless Fannie Mae resumes its referrals or another entity begins making referrals to States that are problematic.

    Recommendation: To improve the process for referring problem appraisals by entities that oversee or use real estate appraisals to the state appraiser agencies for possible enforcement actions, the Chairman of the Appraisal Subcommittee should work with the Chairmen of Fannie Mae and Freddie Mac and the Secretary of the Department of Housing and Urban Development to help ensure that referrals of problem appraisals (1) are provided to states in a format that is useful to the state appraisal agencies and (2) facilitate the subcommittee's efforts to monitor decisions made by states regarding the supervision of appraiser practices.

    Agency Affected: Federal Financial Institutions Examination Council: Appraisal Subcommittee


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