Real Estate Appraisals: Appraisal Subcommittee Needs to Improve Monitoring Procedures
Highlights
What GAO Found
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.
Why GAO Did This Study
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.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status Sort descending |
|---|---|---|
| Appraisal Subcommittee | To help ensure effective implementation of ASC's Title XI and Dodd-Frank Act responsibilities and improve compliance with federal internal control standards, the Chairman of ASC should direct the ASC board and staff to 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. |
Closed – Implemented
In response to our recommendation, the Appraisal Subcommittee (ASC) developed, and included in its policies and procedures manual, a policy to monitor the appraisal requirements of the federal financial institutions regulatory agencies (Agencies). Specifically, the policy states that, effective October 2012: (1) No less than annually, the ASC Executive Director and/or designated staff shall request to meet with the Agencies' staff to be briefed on any publicly proposed or final issuances of regulations or guidance related to the appraisals for federally related transactions; (2) No less than annually, the Executive Director shall provide a written report to the ASC members that includes a written summary of regulations and guidance that the Agencies publicly proposed or adopted, and the potential impact on the State appraiser regulatory programs and credentialed appraisers; (3) ASC staff shall monitor proposed regulations or guidance in process related to appraisals, as information is made publicly available; and (4) ASC shall include in its Annual Report to Congress an overview of the past year's changes to appraisal-related regulations and guidance issued by the Agencies.
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| Appraisal Subcommittee | To help ensure effective implementation of ASC's Title XI and Dodd-Frank Act responsibilities and improve compliance with federal internal control standards, the Chairman of ASC should direct the ASC board and staff to 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. |
Closed – Implemented
In response to our recommendation, the Appraisal Subcommittee (ASC) developed, and included in its policies and procedures manual, a policy for assessing whether the activities of the Appraisal Foundation are grant-eligible under ASC's grant-related authority and responsibilities under Title XI. This policy, which became effective in July 2012, requires that the activities meet certain requirements to be eligible for grant funding. For example, with regard to activities of the Appraisal Standards Board (one of two independent boards the Appraisal Foundation sponsors), the policy states that to be eligible, the activities must (1) relate to the development, interpretation, amendment, or advancement of the Uniform Standards of Professional Appraisal Practice associated with federally related transactions, or special projects related thereto and (2) be included in the annual approved grant award budget.
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| Appraisal Subcommittee | To help ensure effective implementation of ASC's Title XI and Dodd-Frank Act responsibilities and improve compliance with federal internal control standards, the Chairman of ASC should direct the ASC board and staff to 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. |
Closed – Implemented
In response to our recommendation, the Appraisal Subcommittee (ASC) developed a revised system for rating states, effective June 1, 2013, that uses five compliance categories (ranging from excellent to poor) and provides criteria for each category. ASC has included the compliance categories and associated criteria in its policies and procedures manual, policy statements, and compliance review reports to states. ASC also plans to include them in its next Annual Report to Congress.
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