oversight

Regulatory Programs: Opportunities to Enhance Oversight of the Real Estate Appraisal Industry

Published by the Government Accountability Office on 2003-05-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to Congressional Requesters




May 2003
             REGULATORY
             PROGRAMS
             Opportunities to
             Enhance Oversight of
             the Real Estate
             Appraisal Industry




GAO-03-404
             a
                                               May 2003


                                               REGULATORY PROGRAMS

                                               Opportunities to Enhance Oversight of
Highlights of GAO-03-404, a report to          the Real Estate Appraisal Industry
Congressional Requesters




Since the passage of Title XI of the           Title XI created a complex oversight structure for real estate appraisals and
Financial Institutions Reform,                 appraisers that involves private, state, and federal entities. Two private
Recovery, and Enforcement Act of               entities establish uniform rules for real estate appraisals and set minimum
1989, the appraisal and mortgage               criteria for certifying appraisers. State regulatory agencies certify appraisers
lending industry has changed                   based on these criteria. The federal financial regulators oversee financial
dramatically. Some have
concluded that the law is obsolete
                                               institutions’ use of appraisals, and a federal agency, the Appraisal
because the problems Title XI was              Subcommittee, monitors and coordinates the functions of the parties
intended to address—the risk to                involved in regulating appraisals and appraisers.
federal deposit insurance funds and
the lack of uniform standards and              All of these entities except the federal financial regulators identified
qualifications—no longer exist.                potential impediments to carrying out their Title XI responsibilities. The two
Others argue that the law’s purpose            private entities stated that fund limitations could impede their ability to
and scope should be expanded. To               ensure that development of standards and qualifications evolve with
help Congress better understand                changing conditions. State agencies said that funding shortfalls hindered
these issues, GAO looked at the                their ability to enforce compliance. Appraisal Subcommittee staff reported
roles of the private, state, and               that rule-making authority and additional enforcement sanctions could
federal entities that oversee the
appraisal industry, the challenges
                                               facilitate its oversight of state compliance with Title XI.
Title XI presented to these entities,
and industry participants’ concerns            Industry participants raised concerns about aspects of the Title XI regulatory
about the effectiveness of the Title           system for appraisers. They cited differences in state regulation that affect
XI regulatory structure.                       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
Among other things, the Chairman               participants felt that states, traditionally involved in regulating professions,
of the Appraisal Subcommittee                  alone should regulate the appraisal industry. Others felt that the current
should:                                        structure needed a significant overhaul to become effective.
• develop and apply consistent
     criteria for determining and
     reporting states’ compliance              Title XI Regulatory Oversight Structure and Entities
     levels with Title XI;
• explore potential options for
     assisting states in carrying out
     their Title XI activities,
     particularly for investigating
     appraiser complaints; and
• explore alternatives for
     providing future Title XI grant
     funding to the Appraisal
     Foundation and its two boards.



www.gao.gov/cgi-bin/getrpt?GAO-03-404.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact David G. Wood
(202) 512-8678 or woodd@gao.gov.
Contents



Letter                                                                                                       1
                             Results in Brief                                                                3
                             Background                                                                      6
                             Title XI Created a Complex Appraiser Regulatory Oversight
                                Structure                                                                    7
                             Private, State, and Federal Entities Cited Potential Impediments to
                                Fulfilling their Title XI Roles                                             18
                             Industry Participants Raised Various Concerns about the Title XI
                                Oversight Structure                                                         23
                             Conclusions                                                                    36
                             Recommendations                                                                37
                             Agency Comments                                                                38


Appendixes
              Appendix I:    Survey of State Regulatory Agencies (results included)                         42
             Appendix II:    Scope and Methodology                                                          53
             Appendix III:   List of Agencies and Groups Contacted                                          55
                             Federal Agencies                                                               55
                             Government Sponsored Enterprises                                               55
                             Private Organizations                                                          55
                             State Appraiser Regulatory Agencies                                            56
                             Private Consultants                                                            60
             Appendix IV:    National Registry Database of the Appraisal
                             Subcommittee                                                                   61
              Appendix V:    Evolution and Use of Automated Valuation Models                                67
                             Three Types of AVM Models Are Currently Used                                   67
                             Data Sources for AVMs Vary in Completeness and Reliability                     68
                             AVMs Have Both Advantages and Disadvantages                                    69
                             Guidance and Regulations on Using AVMs Are Relatively New                      70
             Appendix VI:    The Appraiser Qualifications Board’s Process and Fees for
                             Approving Appraiser Education Courses and Certifying
                             Instructors                                                                    72
                             AQB’s Course Approval Program                                                  72
                             AQB’s USPAP Instructor Certification Program                                   73
                             Options Provided by AQB for Approving Distance Education
                               Courses                                                                      75
                             Relative Costs of AQB Course Approval and Instructor Certification
                               Programs                                                                     75



                             Page i                         GAO-03-404 Real Estate Appraisal Industry Oversight
                          Contents




                          State Fees for Course and Instructor Approval                                  77
         Appendix VII:    Federal Financial Institutions Examination Council’s Legal
                          Advisory Group Opinion                                                         78
         Appendix VIII:   Comments from the Appraisal Subcommittee                                       87
          Appendix IX:    Comments from the Appraisal Foundation                                         91
           Appendix X:    Comments from Fannie Mae                                                       93
          Appendix XI:    Comments from Freddie Mac                                                      97
         Appendix XII:    Comments from Department of Housing and Urban
                          Development                                                                    99
         Appendix XIII:   GAO Contacts and Acknowledgments                                             101
                          GAO Contacts                                                                 101
                          Acknowledgments                                                              101


Tables                    Table 1: Title XI Roles and Responsibilities for Appraisal Standards
                                   and Appraiser Qualifications                                           9
                          Table 2: State Appraiser Licensing Requirements                                26
                          Table 3: Active Appraiser Licenses, by State and Type                          62
                          Table 4: Disciplinary Actions, by State (Active and Inactive
                                   Licensees)                                                            65
                          Table 5: Approval Service Fees, by Service Provider as of February
                                   2003                                                                  76




                          Page ii                        GAO-03-404 Real Estate Appraisal Industry Oversight
Contents




Abbreviations

AQB          Appraiser Qualifications Board
ASB          Appraisal Standards Board
AVM          Automated Valuation Model
ECAFS        Education Council for Appraisal Foundation Sponsors
FDIC         Federal Deposit Insurance Corporation
FHA          Federal Housing Administration
FIRREA       Financial Institutions Reform, Recovery, and Enforcement Act
             of 1989
FRS          Federal Reserve System
GSE          Government Sponsored Enterprises
HUD          Department of Housing and Urban Development
IDECC        International Distance Education Certification Center
NCUA         National Credit Union Administration
OCC          Office of the Comptroller of the Currency
OTS          Office of Thrift Supervision
USPAP        Uniform Standards of Professional Appraisal Practice

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Page iii                              GAO-03-404 Real Estate Appraisal Industry Oversight
A
United States General Accounting Office
Washington, D.C. 20548



                                    May 14, 2003                                                                                     Leter




                                    The Honorable Paul S. Sarbanes
                                    Ranking Minority Member
                                    Senate Committee on Banking,
                                      Housing, and Urban Affairs
                                    United States Senate

                                    The Honorable Zell Miller
                                    United States Senate

                                    Recent predatory mortgage lending cases, involving fraudulent and inflated
                                    appraisals, have highlighted the need for accurate real estate appraisals in
                                    preventing losses to the federal government and significant financial harm
                                    to individual consumers. When making mortgage loans, lenders need an
                                    objective and accurate assessment of the value of properties used as
                                    collateral to help avoid losses in the event that borrowers do not repay the
                                    loans. Congress enacted Title XI of the Financial Institutions Reform,
                                    Recovery, and Enforcement Act of 1989 (FIRREA) in response to concerns
                                    that faulty and fraudulent appraisals played a major role in the savings and
                                    loans crisis of the 1980s. Title XI provisions address both the quality of
                                    appraisals and the qualifications of appraisers. Specifically, Title XI
                                    requires that real estate appraisals used in connection with federally
                                    related transactions be performed (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.1

                                    To ensure that the purpose of the legislation was carried out, Title XI
                                    created a regulatory structure to monitor and oversee the real estate
                                    appraisal industry. Among other things, it established a federal entity called
                                    the Appraisal Subcommittee to monitor the Title’s implementation. Title XI
                                    provides for national uniformity in appraisal standards and minimal
                                    national qualification requirements for some, but not all, appraisers. The
                                    Title XI regulatory structure was set up primarily to protect federally



                                    1
                                     As defined in Title XI, federally related transactions are real estate transactions involving
                                    financial institutions regulated by the federal government. These include banks, thrifts, and
                                    credit unions. Real estate transactions of mortgage bankers, brokers, pension funds, and
                                    insurance companies are not included.




                                    Page 1                                 GAO-03-404 Real Estate Appraisal Industry Oversight
insured depository institutions from losses and by extension the federal
deposit insurance funds.

Because of your concerns about the effectiveness of the current regulatory
structure, you requested that we assess the appraisal oversight structure
established in response to Title XI. As agreed with your offices, this report
describes (1) the specific responsibilities under Title XI of the private,
state, and federal entities that oversee the appraisal industry and the way
these entities perform their roles; (2) factors that these entities identified
as potential impediments to carrying out their Title XI responsibilities; and
(3) concerns expressed by regulatory entities and industry participants
about the effectiveness of the existing regulatory structure.

To answer these questions, we reviewed FIRREA and its legislative history;
interviewed representatives of the private, state, and federal entities
involved in the Title XI regulatory scheme; and, using a mailed
questionnaire, surveyed appraiser regulatory agencies in the 50 states, the
District of Columbia, and 4 U.S. territories.2 A copy of the questionnaire,
including summary responses to each question, can be found in appendix I.
Additionally, we contacted industry participants, including trade groups
that represent appraisers and lenders; Fannie Mae and Freddie Mac, two
government-sponsored enterprises (GSE) that establish standards for
appraisals used in connection with mortgages that they purchase; the
Department of Housing and Urban Development (HUD), which establishes
requirements for appraisals used in connection with mortgages it insures;
representatives of appraiser education providers; and academic experts on
issues related to real estate appraisals. We also obtained and reviewed
records of the Appraisal Subcommittee’s state oversight activities, as well
as information on appraisers maintained in the subcommittee’s national
registry database. We conducted our work between March 2002 and March
2003 in accordance with generally accepted government auditing
standards. Appendix II provides a detailed discussion of our scope and
methodology, and appendix III contains a list of the entities that we
contacted.




2
 The territories included in our survey are Guam, Northern Mariana Islands, Puerto Rico,
and the Virgin Islands. The only other U.S. territory—American Samoa—does not have a
regulatory oversight structure for appraisers because real estate there can only be inherited.
In this report, the term “states and territories” refers to the 50 states, the District of
Columbia, and the 4 territories.




Page 2                                 GAO-03-404 Real Estate Appraisal Industry Oversight
Results in Brief   Title XI created a complex regulatory system that relies upon the actions of
                   private, state, and federal entities to help assure the quality of appraisals
                   and the qualifications of appraisers used in federally related transactions.

                   • The two private entities—the Appraisal Standards Board and Appraiser
                     Qualifications Board—respectively establish (1) uniform rules for
                     preparing and reporting real estate appraisals and (2) minimum
                     qualification criteria for certified real estate appraisers. Certified real
                     estate appraisers are one of the two categories of appraisers listed in
                     Title XI, the other being licensed real estate appraisers.

                   • Title XI defers to the states with respect to the minimum qualification
                     criteria for the licensed appraisers. In addition, Title XI relies on the
                     states to (1) implement the certification and licensing of all real estate
                     appraisers and (2) monitor and supervise compliance with appraisal
                     standards and requirements. To assure the availability of certified and
                     licensed appraisers, all of the states and 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, license and certify appraisers, and monitor and enforce
                     appraiser compliance.

                   • The federal financial institution regulators—defined in Title XI as the
                     Federal Reserve System (FRS), Federal Deposit Insurance Corporation
                     (FDIC), Office of the Comptroller of the Currency (OCC), Office of
                     Thrift Supervision (OTS), and National Credit Union Administration
                     (NCUA)—are responsible for ensuring that federally insured depository
                     institutions comply with Title XI requirements. To meet these
                     responsibilities, the regulators have (1) adopted rules and policies
                     specifying transactions for which regulated financial institutions are
                     required to obtain an appraisal by a certified or licensed appraiser, (2)
                     developed examination procedures to ensure that regulated financial
                     institutions are in compliance with Title XI, and (3) appointed agency
                     representatives to the Appraisal Subcommittee.

                   • The Appraisal Subcommittee is responsible for monitoring the
                     implementation of Title XI by all parties—private, state, and federal. The
                     subcommittee monitors the efforts of the federal financial institution
                     regulators in developing and adopting appraisal-related regulations and
                     policies, conducts periodic reviews of each state’s licensing and



                   Page 3                          GAO-03-404 Real Estate Appraisal Industry Oversight
   certification program, and provides grants to the Appraisal Foundation
   to support the Title XI-related activities of its two boards—Appraisal
   Standards Board and Appraiser Qualifications Board.

The private, state, and federal entities involved in the Title XI regulatory
structure described a number of factors that they believe could constrain
their ability to perform more effectively and efficiently. For example,
officials of the Appraisal Standards Board and the Appraiser Qualifications
Board told us that insufficient federal grant funding may impede their
ability in the future to ensure that standards and qualifications evolve with
changing conditions, such as how to appraise contaminated or polluted
properties. State appraiser agencies—which are funded at the state level—
reported resource limitations as the primary impediment in carrying out
their oversight responsibilities. For example, of the 54 states and territories
that responded to our survey, 26 reported that the current number of
investigators was insufficient for meeting its regulatory responsibilities, 37
cited a need for increasing the staff directed at investigations, and 22 cited
a need for more resources to support litigation. Officials of the five federal
financial institution regulators reported no major impediments to
accomplishing their Title XI responsibilities. The Appraisal Subcommittee
reported that rule-making authority and additional enforcement sanctions
could facilitate its oversight of state compliance with Title XI.
Subcommittee officials stated that the only enforcement action they can
take under Title XI is to decertify a state, which would prohibit all licensed
or certified appraisers from that state from performing appraisals in
conjunction with federally related transactions. Subcommittee officials
stated that using this sanction would have a devastating effect on the real
estate markets and financial institutions within the state. However, the
Appraisal Subcommittee stated that it has always been able to achieve
states’ compliance under the current enforcement and regulatory structure.

In addition to the impediments described above, officials of the regulatory
agencies, appraiser trade groups, education providers, mortgage industry,
HUD, and the GSEs raised concerns about the Title XI regulatory structure.
However, there was no clear consensus regarding the need for or impact of
possible changes. Some industry participants stated that a growing number
of real estate transactions, such as those placed through mortgage brokers
and those involving dollar amounts below the threshold level established
by the federal financial institution regulators, are not universally subject to
Title XI appraisal requirements. In addition, some industry participants
cited concerns with the lack of a national qualification standard for the
licensed real estate appraiser category. Education providers and appraiser



Page 4                           GAO-03-404 Real Estate Appraisal Industry Oversight
trade groups expressed concerns about the Appraiser Qualifications
Board’s fees and requirements for instructor certification and course
approval. Federal and state regulatory officials expressed concern about
the apparent reluctance of lending institutions to make referrals or
complaints regarding questionable appraisals they identify. HUD and GSE
officials expressed concerns about a lack of consistent and effective
enforcement actions by the states on referred cases and the adequacy of
the Appraisal Subcommittee’s oversight of state programs. This report
makes recommendations to the Appraisal Subcommittee intended to
enhance the effectiveness of the existing regulatory structure.

We received written comments on a draft of this report from the Appraisal
Subcommittee, the Appraisal Foundation, HUD, Fannie Mae, and Freddie
Mac. In addition, we received technical comments from the federal
financial institutions regulators, who indicated that their overall comments
had been incorporated into those provided by the Appraisal Subcommittee.
The Appraisal Subcommittee agreed to take action on our recommendation
to develop and apply consistent criteria for determining and reporting
states’ compliance with Title XI, and did not comment on our
recommendation for greater coordination with HUD, Fannie Mae, and
Freddie Mac on referrals of problem appraisers. Concerning the remaining
two recommendations, the Appraisal Subcommittee

• agreed that additional funding for the states would improve compliance
  with Title XI, but stated that the Subcommittee is not the answer to that
  issue. Because the recommendation is to explore additional funding as
  well as other options for assisting the states, we did not revise it.

• agreed that the Appraisal Foundation faces future grant funding
  constraints, but stated that using the Subcommittee’s surplus is not a
  long-term solution. We modified the report to emphasize that we are
  recommending that the subcommittee explore options, including
  drawing on the subcommittee’s surplus, if necessary, for addressing
  future Appraisal Foundation grant shortfalls.

HUD agreed with our recommendation for greater coordination on
referrals of problem appraisers to state appraiser agencies. Both Fannie
Mae and Freddie Mac expressed concern about this recommendation,
commenting that they are not regulatory entities. We revised the wording of
our recommendation to emphasize the role that HUD, Fannie Mae, and
Freddie Mac can play in helping the subcommittee carry out its oversight
responsibilities.



Page 5                          GAO-03-404 Real Estate Appraisal Industry Oversight
Background   An appraisal is a decision-making tool used to facilitate a real estate
             transaction. The primary role of appraisals in the loan underwriting
             process is to provide evidence that the collateral value of the property is
             sufficient to avoid losses on loans if the borrower was unable to repay the
             loan. Consumers often mistakenly assume that appraisals are intended to
             validate the purchase price of the property in question. Furthermore,
             appraisals are sometimes confused with home inspections, which are
             intended to warn consumers about serious defects in the home being
             purchased that should be repaired. In a loan transaction, the lender rather
             than the borrower engages the appraiser and this usually occurs after the
             borrower has agreed to purchase the property. The primary intent of the
             appraisal reforms contained in Title XI was to protect the federal deposit
             insurance funds--and, by extension, mortgage lenders--from avoidable
             losses.

             An appraisal is an opinion of the value of a property as of a specific date.
             Appraisers generally consider the property’s value from three points of
             view—cost, income, and comparable sales—and determine an estimated
             value based upon weighing the three valuation methods. The 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 the physical deterioration,
             functional obsolescence, and economic obsolescence. The income
             approach is of primary importance in ascertaining the value of income
             producing properties and is an objective estimate of what a prudent
             investor would pay based upon the net income the property produces. The
             comparable sales approach compares and contrasts the property under
             appraisal with recent offerings and sales of similar property. This approach
             is usually considered the most appropriate valuation approach for
             estimating the value of residential real estate property.

             In 1986, the House Committee on Government Operations issued a report
             concluding that faulty and fraudulent appraisals were an important
             contributor to the losses that the federal government suffered during the
             savings and loan crisis.3 In response, Congress incorporated provisions in
             Title XI of FIRREA that were intended to ensure that federally related
             transactions had appraisals that were (1) performed by real estate


             3
              Impact of Appraisal Problems on Real Estate Lending, Mortgage Insurance, and
             Investment in the Secondary Market, H.Rep. 99–891 at 4–6 (Sept. 25, 1986), House
             Committee on Government Operations, 99th Congress, 2nd session.




             Page 6                               GAO-03-404 Real Estate Appraisal Industry Oversight
                       appraisers that had met minimum qualifications criteria and (2) conducted
                       in compliance with uniform standards.

                       In addition to those identified in Title XI, there are other federal and
                       government sponsored entities that have roles with respect to oversight of
                       the real estate appraisal industry. Among these entities, the most important
                       with respect to appraisal oversight issues are the HUD’s Federal Housing
                       Administration (HUD/FHA) and the two large GSEs that purchase
                       residential loans in the secondary market—Fannie Mae and Freddie Mac.
                       HUD/FHA uses appraisals to determine a property’s eligibility for mortgage
                       insurance and to estimate the value of a property for mortgage insurance
                       purposes. Certified and licensed appraisers wishing to perform appraisals
                       for HUD/FHA loans must first be placed on the FHA Roster of Appraisers,
                       which requires the appraiser to pass a HUD/FHA examination on appraisal
                       methods and meet other eligibility requirements. Both Fannie Mae and
                       Freddie Mac consider appraisals or evaluations of the property value as a
                       vital part of their risk analysis for loans that they purchase. For those loans
                       for which Fannie Mae and Freddie Mac require an appraisal, the lender is
                       required to use an appraiser that is state licensed or certified in accordance
                       with the provisions of Title XI.4 Fannie Mae and Freddie Mac largely hold
                       the lender responsible for the selection and quality control of the appraiser.
                       As such, Fannie Mae and Freddie Mac do not maintain a list of approved
                       appraisers.



Title XI Created a     Various private, state, and federal entities play a role with respect to the
                       Title XI regulatory structure (table 1). Private entities—the Appraisal
Complex Appraiser      Standards Board (ASB) and the Appraiser Qualifications Board (AQB)—
Regulatory Oversight   establish minimum standards over the development and reporting of real
                       estate appraisals and minimum qualification criteria for certified
Structure              appraisers. States conduct the certification and licensing of appraisers,
                       including setting education and experience requirements that, at minimum,
                       must meet AQB criteria for certified appraisers and enforcing compliance
                       with appraisal standards. FRS, FDIC, OCC, OTS, and NCUA—hereinafter
                       referred to as the federal financial institution regulators—issue appraisal
                       requirements for the financial institutions under their jurisdiction and


                       4
                        Both Fannie Mae and Freddie Mac allow lenders the options to use an inspection or
                       evaluation instead of a traditional appraisal, on loans that they determine to be low-risk
                       based on their automated loan underwriting systems. In the case of Freddie Mac, certain
                       low risk loans may be eligible for delivery to Freddie Mac with no appraisal or inspection.




                       Page 7                                 GAO-03-404 Real Estate Appraisal Industry Oversight
monitor compliance with their regulations. Lastly, the Appraisal
Subcommittee has primary responsibility for monitoring and reviewing the
actions of the private, state, and federal entities as they relate to Title XI.




Page 8                           GAO-03-404 Real Estate Appraisal Industry Oversight
Table 1: Title XI Roles and Responsibilities for Appraisal Standards and Appraiser Qualifications

                             Private                          State                                       Federal
Appraisal                              Appraiser              Appraiser              Financial
Standards Board                        Qualifications Board   regulatory             institution               Appraisal
(ASB)                                  (AQB)                  agencies               regulatory agencies       Subcommittee
Appraisal standards
 Standard setting
Develop standards for the                                                            Promulgate
performance of real estate                                                           regulations that
appraisals.                                                                          establish appraisal
                                                                                     standards, which
                                                                                     meet or exceed ASB’s
                                                                                     standards, for
                                                                                     federally insured
                                                                                     depository
                                                                                     institutions.
 Implementation/Monitoring
                                                              Enforce compliance     Monitor and enforce       Monitor and review the
                                                              with appraisal         compliance by             Appraisal Foundation’s
                                                              standards and          federally insured         practices, procedures,
                                                              requirements.          depository institutions   activities, and
                                                                                     with appraisal            organizational structure.
                                                                                     regulations.
                                                                                                               Monitor policies,
                                                                                                               practices, and
                                                                                                               procedures of states to
                                                                                                               determine consistency
                                                                                                               with Title XI
                                                                                                               requirements.

                                                                                                               Monitor appraisal
                                                                                                               requirements
                                                                                                               established by federal
                                                                                                               financial institution
                                                                                                               regulatory agencies.

                                                                                                               Make grants to the
                                                                                                               Appraisal Foundation to
                                                                                                               defray the costs of the
                                                                                                               Appraisal Standards
                                                                                                               Board’s Title XI
                                                                                                               activities.




                                               Page 9                              GAO-03-404 Real Estate Appraisal Industry Oversight
(Continued From Previous Page)
                           Private                                State                                           Federal
Appraisal                            Appraiser                    Appraiser                  Financial
Standards Board                      Qualifications Board         regulatory                 institution               Appraisal
(ASB)                                (AQB)                        agencies                   regulatory agencies       Subcommittee
Appraiser qualifications
 Standard setting
                                     Develop minimum              Set qualifications         Establish additional
                                     qualification criteria for   criteria for               qualification criteria
                                     certified real estate        certification, which       as may be necessary
                                     appraisers.                  meet or exceed             or appropriate to carry
                                                                  AQB’s criteria, and        out their statutory
                                                                  licensing of               responsibilities.
                                                                  appraisers.
 Implementation/Monitoring
                                                                  Transmit to the            Prescribe categories      Monitor qualification
                                                                  Appraisal                  of federally related      criteria set by states for
                                                                  Subcommittee a             transactions that         the certification and
                                                                  roster of appraisers       should be appraised       licensing of individuals
                                                                  who have been              by a state certified      qualified to perform
                                                                  licensed or certified.     appraiser and those       appraisals in connection
                                                                                             that can be performed     with federally related
                                                                  Collect from               by either a state         transactions.
                                                                  appraisers and             certified or licensed
                                                                  transmit to the            appraiser.           Maintain a national
                                                                  Appraisal                                       registry of state certified
                                                                  Subcommittee a $25      Monitor and enforce     and licensed appraisers
                                                                  annual registry fee.    compliance by           eligible to perform
                                                                                          federally insured       appraisals in federally
                                                                  Enforce compliance      depository institutions related transactions.
                                                                  with standards,         with appraisal
                                                                  requirements, and       regulations.            Monitor and review the
                                                                  procedures                                      Appraisal Foundation’s
                                                                  prescribed by Title XI.                         practices, procedures,
                                                                                                                  activities, and
                                                                                                                  organizational structure.

                                                                                                                       Make grants to the
                                                                                                                       Appraisal Foundation to
                                                                                                                       defray the costs of the
                                                                                                                       Appraiser Qualifications
                                                                                                                       Board’s Title XI
                                                                                                                       activities.
Source: GAO.




                                               Page 10                                     GAO-03-404 Real Estate Appraisal Industry Oversight
Appraisal Foundation and   The Appraisal Foundation, a nonprofit educational organization composed
Its Two Boards Establish   of groups from the real estate industry, provides the organizational
                           framework for the ASB and AQB to carry out their Title XI-related
Appraisal Standards and    responsibilities.5 It was founded in 1987 by eight leading professional
Minimum Appraiser          appraisal organizations in the United States to foster professionalism in
Certification Criteria     appraising. The ASB and the AQB establish minimum standards for
                           developing and reporting an appraisal and the minimum criteria for the
                           certified appraiser category in connection with federally related
                           transactions.

                           The ASB, which is responsible for setting standards for appraisals, is
                           composed of six appraisers who are appointed for 3-year terms by the
                           Board of Trustees of the Appraisal Foundation. The ASB’s minimum
                           standards for appraisals are contained in the Uniform Standards of
                           Professional Appraisal Practice (USPAP). Under Title XI, these minimum
                           standards apply to all federally related transactions. The standards cover
                           both the steps appraisers must take in developing appraisals and the
                           information the appraisal report must contain. The Foundation sells copies
                           of USPAP but provides a copy of each updated version, free of charge, to
                           the state regulatory agencies.

                           The AQB, which is composed of five appraisers who are appointed for 3-
                           year terms by the Board of Trustees of the Appraisal Foundation,
                           establishes the minimum education, experience and examination
                           requirements for state-certified real estate appraisers (set out in Real
                           Property Appraiser Qualification Criteria and Interpretations of the
                           Criteria). In addition, the AQB performs a number of ancillary duties
                           related to real property and personal property appraiser qualifications. The
                           AQB’s criteria cover four categories of appraisers—certified general,
                           certified residential, licensed, and trainee—each with specific education,
                           experience, examination, and continuing education requirements. Title XI
                           does not require states to adhere to AQB criteria for licensed appraisers or
                           for trainees.

                           Both the ASB and the AQB regularly evaluate USPAP and the appraiser
                           qualification criteria to determine whether revisions are needed. According


                           5
                            The 2002 sponsors of the Appraisal Foundation consisted of eight appraisal organizations,
                           four affiliate organizations (representing primarily the users of appraisal services), and one
                           international appraisal organization. In addition, over 80 organizations, corporations, and
                           government agencies are affiliated with the Appraisal Foundation.




                           Page 11                                GAO-03-404 Real Estate Appraisal Industry Oversight
                              to the Appraisal Foundation, both boards solicit comments from
                              appraisers, users of appraisal services, and the public before making final
                              changes. Since the AQB set its original criteria in 1991, for example, it has
                              issued numerous interpretations and approved two revisions of its criteria.
                              As of January 2003, it was reviewing comments on a third draft of Real
                              Property Appraiser Qualification Criteria.



State Agencies Oversee the    Under Title XI, states may establish their own agencies to certify and
Licensing and Certification   license appraisers. At the time of our review, all 50 states, the District of
                              Columbia, and 4 of the U.S. territories had established such agencies,
of Real Estate Appraisers
                              which typically oversee the activities of appraisers for all types of
                              transactions, including those that are federally related. Of the 54 state and
                              territorial agencies responding to our survey, 30 reported operating as
                              independent bodies, while 23 reported to another state agency or
                              department.6,7 In addition, survey respondents reported that they used
                              boards or commissions as well as state employees to carry out Title XI
                              activities.8

                              All the agencies had established programs for certifying appraisers.
                              Licensing requirements, however, differed. Some states did not require
                              licenses unless appraisers planned to work with federally related
                              transactions. Other states required appraisers to be either licensed or
                              certified to perform a real estate appraisal, even for transactions that are
                              not federally related. State agencies’ licensing and certification programs
                              typically included temporary and reciprocal licensing programs. An
                              appraiser must, in general, obtain some type of license—temporary or
                              reciprocal if not a standard state license—in all states where they want to
                              perform appraisals for federally related transactions.9



                              6
                              We did not receive a response to our survey from the Virgin Islands.
                              7
                               The state of Wisconsin had a hybrid organizational structure composed of an independent
                              board that handled the complaint process (including taking disciplinary action) and a state
                              agency reporting to the Department of Regulation and Licensing that issued appraiser
                              licenses.
                              8
                               California and Guam reported that they did not use boards or commissions for appraiser
                              oversight.
                              9
                               Reciprocity allows appraisers to use a license from their home state to obtain a license in
                              another state without taking examinations or meeting additional requirements.




                              Page 12                                GAO-03-404 Real Estate Appraisal Industry Oversight
                           In addition to conducting licensing and certification activities, all survey
                           respondents indicated that they approve courses for appraisers’ education
                           or training, enforce state regulations concerning appraisals, and investigate
                           complaints. Over half of the states reported that they had adopted appraisal
                           standards in addition to those set by the ASB, and nearly 70 percent
                           reported that they had introduced additional qualifications.

                           Although the states are responsible for the certification and licensing of
                           appraisers under Title XI, the Appraisal Subcommittee has a role in
                           ensuring that state qualifications satisfy Title XI objectives. Title XI directs
                           federal agencies not to accept state certifications and licenses if the
                           subcommittee issues a written finding that:

                           • the state certifying and licensing agency has failed to recognize and
                             enforce the standards, requirements, and procedures of Title XI;

                           • the state agency does not have enough authority to carry out its
                             functions under Title XI; or

                           • the state agency does not make decisions on appraisal standards and
                             qualifications or supervise appraiser practices in a way that carries out
                             the purposes of Title XI. 10

                           In addition, Title XI requires states to provide the Appraisal Subcommittee
                           with the names of those appraisers who become certified or licensed in
                           accordance with Title XI and to collect from them an annual registry fee
                           that goes to the subcommittee.



Federal Regulators         Title XI requires the federal financial institution regulators to ensure that
Determine Which            real estate appraisals used in connection with federally related transactions
                           are performed in accordance with standards developed by the ASB.11 In
Transactions Require       addition, Title XI requires that the federal regulators prescribe the
Appraisals and Establish   categories of federally related transactions that should be appraised by a
Compliance Standards for   state certified appraiser and those that should be appraised by a licensed
Depository Institutions    appraiser. Under the statute, state certified appraisers generally must be
                           used in connection with federally related transactions for all commercial


                           10
                                12 U.S.C. § 3347(a), (b) (2000).
                           11
                                12 U.S.C. § 3339 (2000).




                           Page 13                                 GAO-03-404 Real Estate Appraisal Industry Oversight
real estate transactions greater than $250,000 and all residential
transactions in excess of $1,000,000.12 All other federally related
transactions, unless subject to an exemption as authorized under Title XI,
may utilize a state-licensed appraiser.13

Under Title XI, the federal financial institution regulators may establish a
threshold level at or below which a certified or licensed appraiser is not
required. As of December 30, 2002, each of the five regulatory agencies had
set their appraisal threshold at $250,000.14 Thus, financial institutions have
the option of obtaining either an appraisal or some other form of an
evaluation of the property’s value for mortgage loans of $250,000 or less.
The regulators have issued guidelines to the institutions under their
jurisdiction that specify the requirements for evaluating real estate
collateral for those transactions that do not require an appraisal.

The federal financial institution regulators require that all appraisals for
federally related transactions conform, at a minimum, to USPAP, that they
be written, and that they contain sufficient information and analysis to
support the institution’s decision to engage in the transaction. Regulatory
agencies may take informal and formal enforcement actions, including
memorandum of understanding, removal, prohibition, and cease and desist
orders, and imposing civil money penalties against institutions that violate
their appraisal regulations. These actions can apply to contract (fee)
appraisers as well as appraisers who are employees of the institutions and
institution-affiliated parties. Moreover, pursuant to the FDIC Improvement




12
 The $1,000,000 threshold does not apply to 1-4 unit, single family residential appraisals
unless the size and complexity of the transaction requires a State certified appraiser. Also,
under Title Xl the federal financial institution regulators are responsible for determining
whether other types of transactions warrant the use of a certified appraiser. See 12 U.S.C. §
3342 (2000).
13
 Although the States are responsible for establishing and administering licensing
qualifications, Title XI authorizes the federal financial institution regulators to establish
additional qualification criteria.
14
 The threshold amount is contained in regulations of the respective agencies that set forth
the circumstances under which an appraisal by a state certified or licensed appraiser is
required or not required. See 12 C.F.R. § 34.43 (2002)(OCC), 12 C.F.R. § 225.63 (2002)(FRS),
12 C.F.R. § 323.3 (2002)(FDIC), 12 C.F.R. § 564.3 (2002)(OTS), and 12 C.F.R. § 722.3
(2002)(NCUA).




Page 14                                  GAO-03-404 Real Estate Appraisal Industry Oversight
                               Act of 1991, the federal financial institutions regulators can take action
                               against institution-affiliated parties such as an appraiser.15

                               According to representatives of the regulatory agencies, regulators
                               typically review an institution’s compliance with appraisal regulations
                               during examinations of business risk management policies and practices,
                               during targeted examinations (for example, of real estate transactions and
                               practices), or during reviews of lending transactions. If regulators detect
                               violations or deficiencies, they may take enforcement action or address it
                               within discussions with the institution’s management for corrective action
                               if they believe it affects the institution’s safety and soundness.



Appraisal Subcommittee         Title XI established the Appraisal Subcommittee as the principal federal
Monitors Title XI Regulatory   agency responsible for monitoring the activities of the other components of
                               the real estate appraisal industry oversight structure. Specifically, the
Activities
                               subcommittee is responsible for:

                               • monitoring and reviewing the practices, procedures, activities, and
                                 organizational structure of the Appraisal Foundation—including making
                                 grants in amounts that it deems appropriate to the Appraisal Foundation
                                 to help defray costs associated with its Title XI activities;

                               • monitoring the requirements established by the states, territories, and
                                 the District of Columbia and their appraiser regulatory agencies for the
                                 certification and licensing of appraisers;

                               • monitoring the requirements established by the federal financial
                                 institution regulators regarding appraisal standards for federally related
                                 transactions and determinations of which federally related transactions
                                 will require the services of state-licensed or state-certified appraisers;

                               • maintaining a national registry of state-licensed and state-certified
                                 appraisers who may perform appraisals in connection with federally
                                 related transactions; and




                               15
                                    12 U.S.C. § 1813(q) (2000).




                               Page 15                            GAO-03-404 Real Estate Appraisal Industry Oversight
• transmitting an annual report to Congress regarding the activities of the
  subcommittee during the preceding year. 16

The Appraisal Subcommittee has six board members and seven staff
members. The board members are designated by the heads of the five
financial institution regulatory agencies that collectively make up the
Federal Financial Institutions Examination Council—OCC, FRS, FDIC,
OTS, and NCUA—and HUD. The subcommittee funds its activities through
a portion of the fees assessed by the states against individual appraisers for
licensing and certification.17

According to subcommittee officials, the subcommittee monitors the
Appraisal Foundation by attending all significant meetings and events
associated with its Title XI activities and reviewing all proposed changes or
additions to its appraiser qualifications criteria or USPAP-related
documents. In addition, the subcommittee reviews the Appraisal
Foundation’s grant requests to ensure that the requested funds will only be
used for activities related to Title XI. The subcommittee evaluates the
foundation’s initiatives to determine whether they are eligible for
reimbursement; the initiatives must be reasonable and not arbitrary or
capricious.

The subcommittee monitors the federal financial institution regulators
primarily through informal channels. For example, all six Appraisal
Subcommittee board members are involved in the offices responsible for
appraisal regulation in their individual agencies and provide input from the
subcommittee informally to the agencies. The subcommittee also provides
technical assistance on proposed regulations on appraisal issues. One
official told us that the issues subject to subcommittee monitoring in this
regard are few and tend not to change often. He stated that the only change
he could recall in nearly 7 years was the NCUA's recent decision to raise
the minimal threshold for transactions requiring appraisals from $100,000
to $250,000 to match the levels of the other regulatory agencies.

Monitoring state appraiser regulatory agencies requires performing on-site
field reviews of state agency programs and maintaining close

16
     See 12 U.S.C. § 3332(a) (2000).
17
 Title XI authorizes the Appraisal Subcommittee to charge an annual registry fee of not
more than $25. However, the Federal Financial Institutions Examination Council may
approve fees up to $50 per year. As of March 31, 2003, the annual registry fee was $25.




Page 16                                GAO-03-404 Real Estate Appraisal Industry Oversight
communications with, among others, appraisers, state and federal
agencies, and users of appraisal services. The subcommittee has two
primary review cycles for states—3 years and 18 months. Most states are
scheduled on the 3-year cycle, and states are moved to an 18-month cycle if
more frequent on-site visits are warranted—generally because of concerns
identified during the prior field review. According to the Appraisal
Subcommittee, its field review manual is intended to insure consistent
review and policy applications from state to state. The reviews cover open
and closed complaints; approved and disapproved education providers and
courses; state statutes and regulations on certifying and licensing
appraisers; minutes of board meetings; appraiser registries and fees;
temporary practice and reciprocity; and topical issues such as predatory
lending, fraud, and illegal real estate flipping.18 The letters that summarize
the results of the state field reviews identify concerns, discuss whether the
previous review’s concerns have been resolved, and make general
conclusions about the state’s compliance with Title XI and Appraisal
Subcommittee policy statements. The state field review letters are posted
on the subcommittee’s Web site.

We reviewed the Appraisal Subcommittee’s state field review letters from
1992 to 2002. While the letters provide some information to the state
regulatory agencies, we found no evidence of transparent criteria for how
the subcommittee determined and reported states’ compliance levels. For
example, state field review letters were sometimes inconclusive about
whether the state regulatory program was in compliance. When the letter
contained a determination of compliance, the rationale for this decision
was not always given. For example, some states with identified concerns
were deemed compliant, while others with identified concerns were
deemed noncompliant. Developing and applying consistent criteria to
assess states’ compliance with Title XI requirements could increase the
usefulness of (1) the letters issued to the states in identifying best practices
and how one state measures against other states and (2) the annual reports
that the Appraisal Subcommittee provides to Congress on the
implementation of Title XI.


18
  Illegal real estate flipping is a scheme where a real estate speculator buys a house, usually
in a poor neighborhood, and obtains an inflated appraisal and other fraudulent financial
documents to trick a lender into making a loan that exceeds the fair market value. The
house is sold again at an inflated price to a second buyer. The seller has then made a large
profit on the inflated value of the property. If the second buyer defaults on the loan, the
mortgage lender may not be able to recoup the amount of the loan and will therefore absorb
a loss.




Page 17                                 GAO-03-404 Real Estate Appraisal Industry Oversight
                             Under Title XI, the subcommittee is also required to maintain a registry of
                             state-certified and -licensed appraisers who are eligible to perform
                             appraisals for federally related transactions.19 The registry database is
                             designed to allow users to determine (1) whether an appraiser is eligible to
                             perform such appraisals and (2) whether the appraiser has been subjected
                             to disciplinary action. In addition to eligibility information, the database
                             includes information about the number of active and inactive licenses, the
                             types of licenses, and any disciplinary actions taken by states against
                             appraisers. Appendix IV contains a detailed description of the database and
                             summary information regarding the number of appraisers by license type
                             and enforcement actions reported by the states.



Private, State, and          The private, state, and federal entities involved in the oversight of the real
                             estate appraisal industry identified a number of factors that they believe
Federal Entities Cited       could constrain their ability to fulfill their Title XI responsibilities. ASB and
Potential Impediments        AQB officials stated that an impediment that they may face in the future is
                             inadequate federal funding, which would hinder their ability to ensure that
to Fulfilling their Title    appraisal standards and qualification criteria keep pace with changes in the
XI Roles                     mortgage industry and marketplace. State appraiser agencies reported that
                             they often lack funding to revise their regulations with every USPAP update
                             and to cover the increasing cost of administering the licensing and
                             certification processes. The federal financial institution regulators did not
                             identify any major impediments to fulfilling their Title XI responsibilities,
                             but they did state that reaching consensus on regulatory standards was
                             difficult because of the number of entities involved in the appraisal
                             industry. Appraisal Subcommittee officials reported that rule-making
                             authority and additional enforcement sanctions could facilitate its
                             oversight of state compliance.



The Appraisal Standards      The ASB and AQB reported that financial challenges arise when federal
and Appraiser                grant funding falls short of their needs. Since 1991, the Appraisal
                             Subcommittee has allocated a total of over $9 million in grants to the
Qualifications Board Cited
                             Appraisal Foundation to defray the costs of the ASB’s and AQB’s Title XI-
Concerns about Federal       related activities. For most of this time the allocations have been less than
Funding                      what the ASB and AQB have requested. For example, the ASB and AQB
                             requested a total of over $9 million in grant money between 1994 and 2003,


                             19
                                  12 U.S.C. §3332(a)(3).




                             Page 18                           GAO-03-404 Real Estate Appraisal Industry Oversight
but less than $7 million was approved. However, the Appraisal Foundation
also has other sources of revenue other than the grants it receives from the
Appraisal Subcommittee. For example, the $870,373 grant that the
Appraisal Foundation received during calendar year 2001 represented
approximately 36 percent of the Appraisal Foundation’s total revenue of
$2.4 million for that year. (The largest source of revenue for the Appraisal
Foundation in 2001 was $1.1 million from publication sales.) Further, in
commenting on a draft of this report, the Appraisal Subcommittee noted
that the ASB and AQB had not used all of the grant funds provided in past
years.

The Appraisal Subcommittee told us that it did not have the current-year
funds to fully meet the ASB’s and AQB’s grant requests over the past 3
years. However, the Appraisal Subcommittee had a $3.7 million surplus as
of December 2001. According to Appraisal Subcommittee officials, the
surplus was built up in its early years of operation when its revenues
exceeded its expenses and grants to the ASB and AQB. Subcommittee
officials stated that in recent years its expenses have increased—primarily
due to inflation and expenses associated with its monitoring activities—
and that this in turn has limited the amount of funds available for grants to
the ASB and AQB from current-year funds. They explained that it has not
been the Appraisal Subcommittee’s policy to use the surplus to provide
grants to the ASB and AQB. When the ASB’s and AQB’s initial grant
requests have exceeded the difference between the Appraisal
Subcommittee’s current-year revenues minus its expenditures, the
Appraisal Subcommittee has requested that the Appraisal Foundation
adjust its grant requests accordingly.

Appraisal Subcommittee officials also stated that inflation and other
factors will likely continue to raise the boards’ expenses by up to 5 percent
per year. Given that the number of appraisers has remained static for the
last several years, subcommittee officials did not anticipate their revenues,
which are based primarily on licensing and certification fees, to increase.
As a result, future grants to the ASB and AQB are expected to fall unless
the subcommittee uses its surplus, raises the $25 fee that states collect
from appraisers on the subcommittee’s behalf, or both.

According to ASB and AQB officials, future funding shortfalls may limit the
activities they believe enhance the quality, timeliness, and usefulness of
standards and qualifications. For example, the AQB chair commented that
additional funding is needed to update their “body of knowledge,” which
outlines the concepts, theories, paradigms, and applications of the real



Page 19                         GAO-03-404 Real Estate Appraisal Industry Oversight
                           property appraisal profession and delineates the skill necessary to practice.
                           The AQB believes that updating its body of knowledge is necessary to keep
                           pace with changes in the marketplace. Likewise, ASB and AQB officials
                           stated that funding is needed to ensure that its education and professional
                           standards keep pace with trends and issues such as the lack of terrorism
                           insurance and polluted properties and how they might impact a property’s
                           value. According to ASB and AQB officials, the ultimate impact of funding
                           shortfalls could be a weakening in the protections intended by Title XI
                           because appraisal standards and appraiser qualifications may not keep
                           pace with changes in the marketplace.



States Cited Funding       Most of the states identified funding and staffing deficiencies as the most
Limitations and Frequent   serious challenges they faced in carrying out their Title XI duties. Of those
                           states that reported challenges, about two-thirds of the states said that they
USPAP Updates as
                           needed additional funding to conduct investigations, and over three-
Impediments                quarters said that they needed additional staff. The states also reported that
                           the frequency of USPAP updates was an administrative burden and created
                           challenges in investigating and enforcing complaints of USPAP violations.

                           Based on our survey of state and territorial regulators of the appraisal
                           industry, the average state agency had about 3 staff members, who were
                           responsible for overseeing almost 2,000 appraisers. Many of these state
                           agencies reported that they needed to share resources—administrative
                           staff, office space, investigators, or all three—with other state agencies in
                           order to perform their Title XI duties. The survey results indicated that
                           investigations of complaints about problem appraisers suffered most from
                           these shortages. The majority of states sharing resources were sharing
                           investigators, who often had no real estate appraisal experience. In one
                           agency newsletter, a state official explained that without adequate funding
                           states could not effectively administer their appraiser certification
                           programs and investigate and dispose of disciplinary cases in a timely
                           manner. According to an official from another state, the agency knows that
                           more enforcement and faster turnaround times are needed in investigating
                           complaints but is hindered by its limited resources. According to Appraisal
                           Subcommittee officials, their general counsel analyzed whether the
                           subcommittee could provide grants to the states to help provide funding for
                           their Title XI activities and determined that it lacked the necessary legal
                           authority.

                           Seventy percent of state appraiser regulatory agencies responding to our
                           survey indicated that USPAP updates are too frequent. One state reported



                           Page 20                          GAO-03-404 Real Estate Appraisal Industry Oversight
                                that frequent changes to USPAP have made processing complaints difficult
                                because staff had to review so many versions of USPAP to determine
                                whether complaints were valid. Another state pointed out that regulating
                                appraisers was difficult when the appraisal standards changed so
                                frequently. According to ASB officials, USPAP has been in place for only 15
                                years, and annual updates have been needed because so many changes
                                have occurred in the appraisal industry. Moreover, they told us that many of
                                the changes that have been incorporated into USPAP are a result of
                                requests from state regulators. The officials explained that over the years
                                the ASB has experimented with different formats for updating USPAP but
                                has found that issuing an annual publication has been the best way to
                                ensure that everyone is using the same standards. The ASB and the
                                Foundation are currently working on developing a future publishing
                                schedule of having USPAP issued biennially. In addition, ASB officials
                                stated that they have recently started providing state regulators
                                complimentary newsletters highlighting ASB and AQB activities and noting
                                any changes, modifications, or clarifications to USPAP or appraiser
                                qualifications criteria. Some states have found the annual updates to be a
                                legislative burden in terms of getting the new regulations adopted, but the
                                majority of states reported that they had been able to update their real
                                estate appraisal regulations or rules in 6 months or less.



Federal Financial Institution   The federal financial institution regulators indicated that they have not
Regulators Did Not Identify     encountered any major impediments to fulfilling their Title XI
                                responsibilities. However, some of the federal financial institution
Any Major Impediments           regulators stated that the number of different entities involved in the Title
                                XI oversight structure sometimes made resolving issues difficult and
                                hindered efforts to develop a common approach to examining structural
                                issues. They noted that faulty and fraudulent real estate appraisals have
                                been associated with losses incurred by federally insured financial
                                institutions—such as in the case of illegal real estate flipping—and have
                                resulted in financial harm to individual consumers. However, all of the
                                regulators stated that real estate appraisals have not been a major factor in
                                the failure of depository institutions since the passage of Title XI.




                                Page 21                         GAO-03-404 Real Estate Appraisal Industry Oversight
Appraisal Subcommittee         As discussed earlier, the Appraisal Subcommittee is responsible for
Stated That Rule-Making        monitoring states’ compliance with Title XI. According to subcommittee
                               officials, the lack of rule-making authority and limited enforcement powers
Authority and Enforcement      make achieving the uniformity and standardization intended by Title XI
Options Could Facilitate Its   more difficult. In addition, the officials noted that because the 55 state
Oversight of States            appraiser regulatory agencies took a variety of approaches to implementing
                               Title XI, expanding the subcommittee’s function to allow it to issue
                               regulations would help ensure greater consistency among the states in
                               credentialing appraisers and enforcing the most current version of USPAP.
                               However, giving the Appraisal Subcommittee rule-making authority would
                               also change the subcommittee’s role under Title XI from a monitoring to a
                               regulatory function.

                               The Appraisal Subcommittee has issued 10 policy statements to “assist the
                               states in the continuing development and maintenance of appropriate
                               organizational and regulatory structures for certifying, licensing, and
                               supervising real estate appraisers.”20 For example, Statement 5 indicates
                               that states should not require temporary practitioners—appraisers from
                               other states with temporary licenses—to affiliate with in-state appraisers
                               and recommends that states forward information about disciplinary
                               actions against visiting appraisers to the appraisers’ home states. However,
                               adherence to these recommendations varies across states. Our survey
                               indicated that 98 percent of respondents adhered to the nonafiiliation
                               policy but that less than 50 percent were notifying home states about
                               disciplinary actions.

                               Subcommittee officials stated that currently the only enforcement action
                               they can take under Title XI is to decertify a state. Decertification prohibits
                               all licensed or certified appraisers from that state from performing
                               appraisals in conjunction with federally related transactions. Because this
                               action is so severe and could significantly affect a state’s real estate market,
                               the subcommittee has never used it, and its impact has not been tested. In
                               addition, the decertification action can be taken only for the limited
                               purposes specified in Title XI and is subject to proof requirements and
                               judicial review.21



                               20
                                Appraisal Subcommittee, Policy Statements Regarding State Certification and Licensing
                               of Real Estate Appraisers (Washington, D.C: Sept. 22, 1997, as amended).
                               21
                                    See 12 U.S.C. § 3347(b),(c) (2000).




                               Page 22                                    GAO-03-404 Real Estate Appraisal Industry Oversight
                              During our review, the Appraisal Subcommittee noted that its oversight of
                              the states could be strengthened if it had more enforcement authority—for
                              example, the authority to assess monetary penalties or to require that a
                              state stop an activity or practice. However, in commenting on a draft of this
                              report, the subcommittee stressed that it has always been able to ensure
                              that states are complying with Title XI within the current supervisory and
                              enforcement structure.



Industry Participants         Representatives of federal and state regulatory agencies, appraiser trade
                              groups and education providers, and the mortgage industry expressed
Raised Various                various concerns and conflicting viewpoints about the Title XI regulatory
Concerns about the            structure. Some of the industry participants cited the concern that Title XI
                              left the minimum qualification criteria for licensed real estate appraisers to
Title XI Oversight            the states resulting in the lack of a national standard and gaps in Title XI’s
Structure                     regulatory coverage, particularly the exclusion of certain types of financial
                              institutions and mortgage brokers who increasingly account for a large
                              volume of loan originations. Second, some cited concerns about a lack of
                              uniformity among the states in (1) licensing and certification practices, (2)
                              requirements for approving educational activities, and (3) complaint
                              referrals and enforcement activities, especially for suspected problem
                              appraisers. These perceived gaps in the Title XI oversight structure are, in
                              part, reflective of the primary intent of Title XI, which was to protect the
                              federal deposit insurance funds rather than individual consumers. There
                              was no clear consensus regarding the need for or impact of possible
                              changes to the existing Title XI regulatory structure.



Industry Participants Cited   Participants in the real estate appraisal industry expressed concern that
Lack of National Licensing    licensed real estate appraisers, unlike certified appraisers, do not have to
                              meet national qualification criteria. According to many of the groups we
Criteria
                              contacted, Title XI’s most significant shortcoming is the provision that
                              leaves the criteria for licensed appraisers to each state, including decisions
                              such as how often appraisers should be licensed and whether they should
                              be licensed at all. Under Title XI, a “state-licensed appraiser” is defined as
                              “an individual who has satisfied the requirements for state licensing in a
                              state or territory.”22 In contrast, certified appraisers must meet certification



                              22
                                   12 U.S.C. § 3345(c) (2000).




                              Page 23                            GAO-03-404 Real Estate Appraisal Industry Oversight
criteria that adhere to the AQB’s requirements.23 While Title XI contains this
mandate for certified appraisers, it contains no reference to licensing
requirements for licensed appraisers. Moreover, Title XI specifies that the
subcommittee will not set requirements for licensing and that any
subcommittee recommendations are nonbinding.24 However, the federal
financial institutions regulators have the authority to issue additional
qualification requirements as needed to carry out their statutory
responsibilities.25

Some groups believe that this provision has led to a lack of uniform
qualifications in licensing across the country (for example, in education
and experience) and may also have helped to create an environment
conducive to mortgage fraud. According to an official from the Appraisal
Subcommittee, Title XI’s intent was to ensure that appraisers for federally
related transactions met minimum requirements for experience and
education and had been examined in order to ensure a minimum level of
competency. Under the current system, individuals in some states can
qualify for an appraiser license without having satisfied any educational
requirements or met any criteria for work experience and without having
passed any examinations.

Officials from the Appraisal Subcommittee reported that while most states
have adopted statutory or regulatory provisions requiring licensed
appraisers to meet AQB recommended criteria, six states do not have a
state-licensed appraiser category, and six have licensing requirements that
are less stringent than the AQB’s. As a result, subcommittee officials said,
some licensed appraisers may not meet recommended qualifications
criteria. For example, in 2002, one state passed legislation that eliminated
the experience requirement for its licensed appraisers; and, in 2001,
another state revised its licensing criteria to comply with AQB
requirements but at the same time “grandfathered” in several hundred
licensed appraisers. As a result, lenders and homebuyers who rely on proof
of licensing when hiring appraisers may not know what kind of criteria, if
any, the appraisers were required to meet. The Appraisal Subcommittee




23
     12 U.S.C. § 3345(a) (2000).
24
     12 U.S.C. § 3345(e) (2000).
25
     12 U.S.C. § 3345(d) (2000).




Page 24                            GAO-03-404 Real Estate Appraisal Industry Oversight
and other industry participants view the issue as a growing problem, since
licensed appraisers are likely to perform the majority of residential
appraisals.

According to two regulatory officials, problems related to the lack of
uniformity in licensing appraisers are compounded by the fact that Title XI
also makes licensing voluntary at the state level. Voluntary licensing means
that the state does not have a legislative requirement that appraisers be
licensed or certified. However, the volunteer states do provide the
opportunity for an appraiser to become licensed or certified to perform
federally related transactions. These regulators, as well as one appraiser
trade group, view voluntary licensing as a serious flaw in the industry’s
regulatory structure and a probable contributor to mortgage fraud.
Moreover, voluntary licensing may indirectly place the onus on financial
institutions to ensure that appraisers for federally related transactions have
the appropriate qualifications. According to officials from the Appraisal
Subcommittee, state licensing requirements for appraisers falls into one of
three categories—voluntary, mandatory for federally related transactions,
and mandatory (table 2). As of March 2003, 10 states were classified as
being in the voluntary licensing category, and one federal financial
institution regulator reported that most of the mortgage fraud problems it
has encountered have occurred in states where licensing is voluntary. His
views were echoed in an earlier Federal Bureau of Investigation testimony
at a special congressional hearing on predatory lending in March 2000.26
According to this testimony, the most egregious property flipping problems
have occurred in states where licensing is voluntary for transactions that
are not federally related.




26
 Form of Real Estate Fraud Known As Flipping: Hearing before a Subcommittee of the
Senate Committee on Appropriations, March 27, 2000, Baltimore, Maryland.




Page 25                            GAO-03-404 Real Estate Appraisal Industry Oversight
Table 2: State Appraiser Licensing Requirements

State licensing requirement       Description of requirement                            States
             a
Voluntary                         State law does not require appraisers to be      Alaska, Indiana, Iowa, Kentucky, Louisiana,
                                  state licensed or certified. A person wanting to Massachusetts, North Dakota, Ohio, Oklahoma,
                                  perform appraisals connected with federally      and Wyoming (10)
                                  related transactions may choose to become
                                  state licensed or certified.b
Mandatory for federally related   State law requires all appraisers connected           Arkansas, California, Colorado, Florida, Georgia,
transactions only                 with federally related transactions to be state       Hawaii, Illinois, Kansas, Maryland, Montana, New
                                  licensed or certified. Persons performing             Hampshire, New York, Vermont, Wisconsin, and
                                  appraisals in transactions that are not federally     Guam (15)
                                  related need not be licensed or certified.
Mandatory                         State law requires all persons performing any         Alabama, Arizona, Connecticut, Delaware,
                                  kind of appraisal activity for any kind of real       District of Columbia, Idaho, Maine, Michigan,
                                  estate transaction to be state licensed or            Minnesota, Mississippi, Missouri, Nebraska,
                                  certified.                                            Nevada, New Jersey, New Mexico, North
                                                                                        Carolina, Oregon, Pennsylvania, Rhode Island,
                                                                                        South Carolina, South Dakota, Tennessee,
                                                                                        Texas, Utah, Virginia, Washington, West Virginia,
                                                                                        Northern Mariana Islands, Puerto Rico, and
                                                                                        Virgin Islands (30)
Source: Appraisal Subcommittee.
                                          a
                                           According to a subcommittee official, under this requirement appraisers who are not licensed or
                                          certified could perform appraisals in connection with federally related transactions without violating
                                          state law, but the federally regulated financial institution using that appraiser's services could be
                                          subjected to federal regulatory action.
                                          b
                                          Under state law, federally related transactions should include transactions involving the Federal
                                          Housing Administration and the two government-sponsored enterprises, Fannie Mae and Freddie Mac.




Industry Participants Were                Industry participants also voiced concerns about the fact that Title XI does
Concerned That Title XI                   not cover financial institutions and mortgage brokers that are not subject
                                          to federal regulation. When Title XI was enacted, federally regulated
Does Not Cover Many
                                          lending institutions made most mortgage loans. Today, other financial
Transactions                              institutions, such as mortgage bankers and finance companies, account for
                                          a substantial share of the mortgage marketplace. Many of these financial
                                          institutions that are not federally regulated, as well as an increasing portion
                                          of regulated financial institutions, use mortgage brokers to originate loans,
                                          so that these brokers now originate about 50 percent of all mortgage loans.
                                          These entities and individuals may have state licenses, but they are not
                                          monitored by federal or state entities through, for instance, examinations




                                          Page 26                                     GAO-03-404 Real Estate Appraisal Industry Oversight
                              or audits.27 Appraisers have anecdotally reported that these originators
                              pressure them the most to appraise properties at or near the purchase price
                              to assure that the mortgage transaction will occur.

                              As previously noted, the federal financial institution regulators have set the
                              minimum for transactions requiring appraisals at $250,000. Some industry
                              participants have said that this threshold and any increases to it undercut
                              efforts to protect consumers. These groups believe that oversight of real
                              estate appraisals should be geared toward the interests of consumers, who
                              should be able to expect an unbiased, objective third-party opinion of the
                              value of real property offered as security for a loan. However, Title XI was
                              enacted in response to the impact of appraisal problems on federally
                              insured depository institutions, and federal financial institution regulators
                              have identified few problems or risks to depository institutions associated
                              with loans valued below the $250,000 threshold. For transactions of less
                              than $250,000, federal financial institution regulators allow lenders to use
                              either an evaluation—a simpler assessment of a property’s market value.
                              For example, the results of a computerized valuation known as an
                              automated valuation model (AVM) could be used as the basis for an
                              evaluation. 28 The two groups holding some of the largest portfolios of
                              residential real estate mortgages, Fannie Mae and Freddie Mac,
                              increasingly are using AVMs in place of traditional appraisals. However,
                              because an evaluation or AVM is not considered an appraisal, it is not
                              subject to the same standards and does not require a licensed or certified
                              appraiser. Appendix V describes the basic types of AVMs and the benefits
                              and concerns that have been associated with them.



Industry Participants Cited   Representatives of various groups we contacted expressed some concerns
Differences Among State       about differences in the standards that states have set for temporary,
                              reciprocal, and general licenses. The differences noted by these groups
Licensing Programs
                              focused on the lack of uniformity in the implementation of Title XI

                              27
                               Fannie Mae officials noted that when an appraisal is required for a mortgage that will be
                              delivered for sale to the GSE, mortgage brokers must use appraisers that are state-licensed
                              or certified in accordance with Title XI.
                              28
                                An evaluation is generally performed by an individual who does not need a license or
                              certification. For more information on real estate evaluations, see U.S. General Accounting
                              Office, Bank and Thrift Regulation: Better Guidance Is Needed for Real Estate
                              Evaluations, GAO/GGD-94-144 (Washington, D.C.: May 23, 1994). In addition, the federal
                              financial institutions regulators issued Interagency Appraisal and Evaluation Guidelines on
                              October 27, 1994.




                              Page 27                               GAO-03-404 Real Estate Appraisal Industry Oversight
requirements. According to these groups, the lack of uniformity between
states in the implementation of Title XI has created difficulties for lenders
and appraisers who operate in multiple states.

Industry participants cited a lack of uniformity in the way states grant
temporary and reciprocal licenses. Because credentials from one state may
not be recognized by another, appraisers often have to carry multiple state
licenses. Title XI requires states to recognize on a temporary basis real
estate appraisers who have been certified or licensed by another state if
certain conditions are met and encourages states to develop reciprocity
agreements that readily authorize appraisers who are licensed by and in
good standing with their home state to perform appraisals in other states.29
The Appraisal Subcommittee has issued policy statements on temporary
practice and encouraging reciprocity. However, our survey indicated that
state regulatory agencies continue to vary widely on these issues. For
example, of the 53 states and territories that responded to this question, 40
issued temporary licenses for single assignments, 16 allowed an appraiser
only one temporary license at a time, and 15 limited the number of
temporary licenses an appraiser could receive annually. Six of the 54
respondents to our survey indicated that visiting appraisers are required to
pass a state exam in order to receive a reciprocal license. This practice is
not only inconsistent with the spirit of Title XI but also with the Appraisal
Subcommittee’s guidance recommending that states accept licenses or
certification from other states meeting AQB requirements. In addition, a
representative from a banking trade group told us that lenders are
dissatisfied with state reciprocal licensing requirements, which make it
difficult to use the same appraisers in multiple jurisdictions or states. The
trade group representative added that some states are more restrictive than
others. According to our survey, 23 states and territories require a
reciprocity agreement with the state or territory issuing an appraiser’s
original license before issuing a reciprocal license. The inability to readily
obtain a license in another state may be especially problematic during
periods of heavy refinancing, when some states may need more appraisers.

Further, the states do not use uniform appraiser classifications or fee
requirements. The Appraisal Subcommittee recognizes four licensing
categories in its National Registry of Appraisers—licensed, certified
general, certified residential, and transitional license. We found that the
number of categories for licensed and certified appraisers used by the


29
     12 U.S.C. § 3351(a),(b) (2000).




Page 28                                GAO-03-404 Real Estate Appraisal Industry Oversight
                           states and territories ranged from two to seven and included such non-AQB
                           classifications as residential real property appraiser and limited general
                           appraiser. The states’ license fees also varied by the type of license or
                           certification sought and the number of years it covered. Individual states
                           set fees for certifying and licensing appraisers, with annual fees ranging
                           from $22 to $450 and initial licensing terms of from 1 to 4 years. For the 55
                           state agencies with a certified general appraiser classification, we found
                           that 22 states had a 1-year term with fees ranging from $120 to $450, 28
                           states had 2-year terms and fees from $44 to $680, and 3 states had 3-year
                           terms with fees from $150 to $470. One state had a 4-year term but did not
                           provide information on its fees.30

                           The results of our analysis of license renewal fee requirements were
                           similar. Specifically, for the certified general appraiser classification, we
                           found that 19 states had a 1-year term with fees ranging from $105 to $400,
                           29 states had 2-year terms with fees from $100 to $610, and 6 states had 3-
                           year terms with fees from $225 to $470. We also found that these provisions
                           varied depending on the category of license or certification sought. For
                           example, the renewal term for a licensed real property appraiser
                           (residential) ranged between 1 to 4 years across states, while the renewal
                           term for a licensed real property appraiser (general) ranged from 1 to 2
                           years.



Industry Participants      Several state regulators and education providers expressed concerns about
Expressed Concerns about   the expenses and lack of uniformity in the processes associated with
                           approving instructors and courses for appraisers’ continuing education. A
the Costs and Lack of
                           representative of an appraisers’ trade group noted that gaining approval for
Uniform Approval           a course and an instructor in one state does not necessarily translate into
Processes for Appraiser    approval in other states. As a result, the trade group spent around $30,000
Education Courses          having courses for a July 2000 training conference approved in all
                           jurisdictions. He added that one-fourth of the states require certified
                           checks, notarized documents, or both to initiate the course approval
                           process. These participants believe that the added cost and procedures
                           involved in acquiring approval in each state is overly burdensome.

                           AQB officials told us that the board has set up a voluntary national system
                           for approving courses and that these concerns had influenced their project.

                           30
                            The remaining state’s program charged a certified general appraiser $45 in even-numbered
                           years and $90 in odd-numbered years.




                           Page 29                              GAO-03-404 Real Estate Appraisal Industry Oversight
AQB and Appraisal Foundation officials said that their efforts were not
intended to usurp the states’ authority. According to the AQB, the course
approval program was designed to be a convenience for both course
providers and state regulators while helping to ensure quality appraisal
courses. However, AQB’s course and instructor approval programs have
met opposition in some quarters. For example, some state officials and
other industry participants stated that requiring AQB approval for all
USPAP refresher courses and instructors and restricting course materials
and examinations to AQB publications—for which AQB charges a royalty
fee—represent a conflict of interest. However, AQB officials stated that any
educational provider may submit a USPAP course for consideration to be
deemed equivalent to the national USPAP courses and added that, to date,
four educational providers have submitted courses which have been
approved as equivalent to the national USPAP courses. In addition, some
education providers have stated that the fees charged by the AQB for its
course and instructor approval are excessive. On the other hand, some
state and federal financial institution regulators believe that the Appraisal
Foundation and its boards possess expertise and resources the states do
not have and thus are needed to ensure that the quality of appraiser
education and training is not compromised. Appendix VI contains
information on the fees charged by the AQB for its course and instructor
approval programs.

Similarly, some states and educators have expressed concern that the AQB
and Appraisal Subcommittee have encroached upon state authority in
setting certain appraisal standards and appraiser qualifications. For
example, the regulatory agency and an education provider in one state
objected to certain AQB education requirements for certified appraisers, in
particular a requirement that education providers be certified through the
AQB’s instructor certification program. As part of its industry monitoring
function, the Appraisal Subcommittee reviewed those standards and
determined that the AQB had acted appropriately in adopting them. The
Appraisal Subcommittee has also instructed states to rescind approvals of
distance education courses for certified real property appraisers if the
courses or their providers did not conform to AQB criteria.31 The state
appraiser regulatory agency and education provider contended that the


31
  Distance education does not require that the student be physically present in the same
location as the instructor. Common delivery systems used in distance education involve
technology such as video, computer-based training, and the Internet to bridge the
instructional gap.




Page 30                               GAO-03-404 Real Estate Appraisal Industry Oversight
                              education provider standards exceed the scope of the AQB’s responsibility
                              as contemplated by Title XI and that the Appraisal Subcommittee, by
                              recognizing and affirmatively applying those standards, acted beyond its
                              monitoring authority.

                              In light of those assertions, the Appraisal Subcommittee requested a legal
                              opinion from the Legal Advisory Group of the Federal Financial Institutions
                              Examination Council on (1) the scope of AQB’s authority to adopt
                              education-related standards for certified appraisers; (2) the scope of the
                              Appraisal Subcommittee’s responsibility in monitoring the AQB; and (3) the
                              Appraisal Subcommittee’s authority to oversee state regulators’
                              implementation of AQB standards.32 In a June 2002 opinion, the Legal
                              Advisory Group concluded that the AQB’s and Appraisal Subcommittee’s
                              actions appeared to be consistent with and authorized by Title XI. Referring
                              to the legislative history of Title XI, the Legal Advisory Group opinion
                              stated that with Title XI Congress intended to create consistent
                              certification standards for appraisals nationwide and that Congress relied
                              on the AQB to set minimum appraiser certification criteria. A copy of this
                              decision can be found in appendix VII.



Industry Participants Cited   Participants in the real estate appraisal industry described the process of
a Need for Improvement in     referring questionable appraisals or appraisers to state regulatory
                              authorities as needing improvement, saying that few referrals were being
the Referral Process for
                              made. Title XI instructs federal agencies or federal instrumentalities to
Problem Appraisers            report any action of a state-certified or -licensed appraiser that represents a
                              violation of Title XI requirements to the appropriate state agency.33
                              According to an Appraisal Subcommittee official, a referral is basically a
                              notice to the state agency that a potential violation exists that warrants
                              investigation.

                              State regulatory officials also said that they had received few referrals from
                              lenders and bank regulators. The state officials believed this problem was a
                              serious one and felt that institutions engaging appraisers should be
                              responsible for referring appraisers to agencies for investigation and
                              disciplinary action. Our survey of state regulators suggests that lenders and


                              32
                               The Legal Advisory Group consists of the general or chief counsels of the FDIC, FRS, OCC,
                              OTS, and NCUA.
                              33
                                   12 U.S.C. § 3348(c).




                              Page 31                               GAO-03-404 Real Estate Appraisal Industry Oversight
federal agencies are referring few problem appraisers. Results of the
survey showed that the greatest percentage of complaints came from
consumers and other appraisers. Likewise, Appraisal Subcommittee staff
reported that based on their state reviews, lenders and bank regulators are
not actively making referrals and that when they do, the referrals are often
incomplete or unspecific.

Federal financial institution regulators have an official interagency policy
encouraging depository institutions to make referrals. But officials from
the regulatory agencies told us that the institutions often follow the advice
of their legal departments and simply stop using offending appraisers
rather than reporting them because of the potential for lawsuits. In
addition, one regulatory official stated that regulations on confidentiality
and disclosure prevented them from providing information discovered
during an examination unless a criminal act had occurred.

However, both HUD and Fannie Mae have made referrals to state
regulatory agencies. HUD, for example, has made such referrals, even
though it has internal systems in place for disciplining problem appraisers.
HUD imposes administrative sanctions—usually removing the problem
appraisers from the FHA Register for a specified time—and then notifies
the state licensing or certification agency in writing of its action. During
calendar year 2002, HUD made 112 referrals to state regulatory agencies. In
the referrals, HUD provided the state agency with the appraiser’s license or
certification number, the reason for removal, and copies of the original
appraisal(s) and HUD’s review. Officials from Fannie Mae, which made 860
referrals to 45 different state regulatory agencies between August 2001 and
August 2002, commented that the agency had revised its referral program
to better meet state regulatory agencies’ information needs for processing a
referral. Fannie Mae officials informed us that they provided a complete
copy of each questionable appraisal report and an appraisal review
performed by another state-licensed or –certified appraiser in the same
state to help identify the appraisal deficiencies for the state’s review and
investigation. The officials also noted that it was difficult to refer
questionable appraisals to the different state agencies due to the lack of
consistent processes and procedures for accepting, reviewing, and
investigating questionable appraisal reports.

In the case of both HUD and Fannie Mae, neither entity was routinely
providing the Appraisal Subcommittee with copies or listings of the
referrals made to the states. According to Appraisal Subcommittee
officials, information on referrals made to the states would aid them in



Page 32                         GAO-03-404 Real Estate Appraisal Industry Oversight
                              their field reviews of the states’ responsiveness to complaints about
                              appraisers. According to Fannie Mae officials, they provided the Appraisal
                              Subcommittee with 27 cases (involving 13 different states) in May 2002,
                              along with the states’ responses, to demonstrate lack of effective
                              enforcement actions by some of the states. Fannie Mae discontinued
                              sharing information on referrals with the Appraisal Subcommittee due to
                              its perception that the subcommittee did not take action on the specific
                              referrals.



Industry Participants Noted   Some industry participants reported a lack of uniformity in processing
Variations in State           complaints and taking disciplinary actions against those problem
                              appraisers that were referred to state regulatory authorities and cited this
Regulatory Agencies’
                              issue as an obstacle to an effective enforcement program. Furthermore, the
Enforcement of Title XI       state agencies told us that while they have enforcement structures in place,
Requirements                  some agencies have questioned their ability to mount effective
                              enforcement programs because of funding shortfalls; as noted earlier, many
                              states responding to our survey reported funding inadequacies. In general,
                              the complaint process entails filing a complaint alleging a violation,
                              conducting an investigation, determining whether a violation occurred, and
                              rendering an outcome, including any disciplinary actions. Industry
                              participants’ concerns about the enforcement process included differences
                              in state requirements and practices for filing a complaint, the quality and
                              timeliness of investigations, and complaint outcomes.

                              Several entities reported that states’ complaint filing requirements ranged
                              from simple to onerous. For example, some states require simply that
                              complainants submit information on an allegation, while other states
                              accept complaints only on a specific form. Further, some states required
                              that complaint documents be notarized or that complainants provide
                              witnesses and testify against appraisers. Some industry participants also
                              stated that the length of time needed to resolve a complaint was too long—
                              for example, one state required 1 to 2 years—potentially allowing the
                              appraiser to continue what might be fraudulent or questionable practices.
                              Some groups also cited statutes of limitations as a major obstacle in
                              penalizing appraisal violators. For example, statutes in at least three states
                              prohibit both investigations into and punitive actions for unlawful appraisal
                              activities that allegedly took place more than 3 to 5 years earlier. Finally, at
                              least one complainant reported concerns about the expertise of
                              investigators, noting that investigators in the Attorney General’s office
                              handling a case of mortgage fraud may not be knowledgeable about the
                              appraisal profession.



                              Page 33                          GAO-03-404 Real Estate Appraisal Industry Oversight
In addition to concerns about the complaint process, industry participants
reported misgivings about outcomes, including disciplinary actions and
feedback. For example, Fannie Mae officials commented that they had
been dissatisfied with some state decisions on punitive actions and with
the lack of feedback on actions that had actually been taken. The officials
added that some states do not penalize appraisers for multiple violations if
the appraisers have already been disciplined or do not tell complainants
what action was taken. The Fannie Mae officials reported that they have
observed a lack of consistent and effective investigation and enforcement
by some of the states. As an example, they noted that some states appeared
to perform meaningful investigations and took appropriate actions while
other states appeared unwilling to investigate similar cases with
comparable support and documentation. According to the officials, Fannie
Mae is considering discontinuing the practice of sending referrals to
several states because, in their view, the state regulatory agencies have
failed to act on them. HUD officials echoed this view, saying that states
typically do not take action when they are notified that an enforcement
action has been taken against an appraiser. In those rare instances when a
state does take an action, it often refuses to disclose this information to
HUD, citing privacy concerns. However, Appraisal Subcommittee officials
told us that in many states, state law might prohibit the disclosure of
actions that are not a matter of public record. Another industry participant
reported that there is little incentive to make referrals given the fact that
there is no assurance that the state will take action.

According to Appraisal Subcommittee officials, a number of states have
told them that the referral information that Fannie Mae and HUD have
provided to the states is frequently in a format or manner that they cannot
readily absorb or use. For example, some of the states indicated that they
received over a hundred referrals from Fannie Mae as one group, which
overwhelmed the states’ ability to review and investigate the referrals in a
timely basis. Other states stated that the referrals were for real estate
transactions for which the state’s statute of limitations had already expired.
Fannie Mae officials indicated that their referrals consistently include a
copy of the questionable appraisal and an appraisal field review performed
by a state-licensed or –certified appraiser in the same state. Fannie Mae
recommended that the states adopt the one-unit residential appraisal field
review report as sufficient documentation for referred appraisals of one-
unit properties. 34


34
     Fannie Mae Form 2000 and Freddie Mac Form 1032, dated December 2002.




Page 34                               GAO-03-404 Real Estate Appraisal Industry Oversight
                          We analyzed data states submitted to the Appraisal Subcommittee and
                          found that the number of disciplinary actions taken differed widely. For
                          example, one state reported taking only a single disciplinary action against
                          an appraiser, while two other states accounted for over 25 percent of the
                          4,360 disciplinary actions reported as of October 31, 2002.35



Industry Participants     There was no clear consensus among the industry participants that we
Indicated No Clear        contacted regarding the need for or impact of possible changes to the
                          existing Title XI regulatory structure. For example, our survey did not
Consensus Regarding the   indicate a clear consensus among state regulatory agencies on the impact
Need for Changes to the   of eliminating various aspects of the current Title XI regulatory oversight
Title XI Regulatory       structure. However, one state appraiser agency official said that Title XI
Structure                 had achieved its intended purpose of protecting federal interests and that
                          federal involvement in the oversight of the real estate appraisal industry is
                          no longer needed. Another representative of a state appraiser agency stated
                          that Title XI needed to be dramatically amended to correct deficiencies in
                          the current appraisal oversight structure.36

                          Among the various representatives of trade groups, education providers,
                          and other industry participants that we contacted, there were differing
                          opinions as to what, if any, changes were necessary to Title XI. Likewise,
                          the responses to the survey that we sent to the state appraiser agencies did
                          not indicate a clear consensus regarding states’ views of the impact of
                          eliminating some of the central aspects of the Title XI regulatory structure.
                          For example, 22 states and territories (41 percent) said that eliminating the
                          Appraisal Subcommittee would help in regulating appraisers, while 17 (31
                          percent) responded that eliminating the subcommittee would be a
                          hindrance. The remaining states felt that not having the subcommittee
                          would neither help nor hinder regulation. The states responded more
                          positively to the ASB and AQB, with 31 and 23 states, respectively,
                          indicating that eliminating them would hinder efforts to regulate
                          appraisers.

                          However, some officials from state appraiser agencies have expressed
                          strong viewpoints regarding the need for changes to Title XI. For example,
                          an official from one of the state appraiser regulatory agencies noted that of


                          35
                               See appendix IV.
                          36
                               See appendix I, question 21.




                          Page 35                             GAO-03-404 Real Estate Appraisal Industry Oversight
              over 30 regulated professions, only the appraisal profession has federal
              oversight. According to this official, Title XI has resulted in the
              establishment of state appraiser regulatory agencies in each of the states
              and the adoption of minimum appraisal standards and appraiser
              qualification criteria, thus protecting federal interests in regulating the
              appraisal industry. This official stated that the states are now in a position
              to oversee the real estate appraisal industry without any federal
              involvement, much as they do other professions. He suggested that
              Congress eliminate the Appraisal Foundation and the AQB and make the
              ASB independent and self-supporting.

              An official from another state regulatory agency said that to correct the
              present system’s problems, Congress would need to completely restructure
              the Title XI structure. He also recommended eliminating the Appraisal
              Subcommittee and the Appraisal Foundation, replacing them with a new
              board at the federal level. The new board would represent the appraisal
              industry more broadly and have strong Congressional accountability. In
              addition, he recommended that the minimum standards for appraisals and
              appraiser qualifications be amended only every 5 years, if needed. He also
              suggested that Congress clearly designate the states as having sole
              responsibility for administering and enforcing Title XI.



Conclusions   Title XI brought about significant changes in the real estate appraisal
              industry. According to federal financial institution regulators, real estate
              appraisals have not been a major factor in the failure of federally insured
              financial institutions since the passage of Title XI. However, opportunities
              exist to enhance the effectiveness of the current regulatory system to help
              ensure that federally related transactions are based on accurate
              assessments of the value of properties used as collateral for loans.

              Developing and applying consistent criteria to assess states’ compliance
              with Title XI requirements could increase the usefulness of the letters that
              the Appraisal Subcommittee provides to the states based on its field
              reviews as well as the annual report that the Appraisal Subcommittee
              provides to Congress on the Title XI program. Further, the Appraisal
              Subcommittee’s field reviews of the states could be enhanced if HUD and
              the government sponsored enterprises provided the subcommittee with
              information on referrals made to the states on questionable appraisals and
              problematic appraisers. Similarly, the Appraisal Subcommittee could help
              HUD and Fannie Mae ensure that referral information on problem




              Page 36                          GAO-03-404 Real Estate Appraisal Industry Oversight
                  appraisals is provided to the state appraiser agencies in a format and
                  manner that facilitates appropriate follow-up action by the states.

                  Achieving Title XI’s purpose depends in part on the ability of ASB and AQB
                  to ensure that appraisal standards and qualification criteria for appraisers
                  are reflective of changes in the real estate mortgage industry and
                  marketplace; these entities’ ability, in turn, depends in part on the amount
                  of funding provided to them annually by the Appraisal Subcommittee.
                  Achieving Title XI’s purpose also depends on actions taken by the states.
                  The lack of funding and resources cited by state appraisal regulatory
                  agencies suggests that some states may be unable to adequately enforce
                  appraiser compliance with the minimum standards envisioned by Title XI.
                  At the same time, the Appraisal Subcommittee—the primary federal entity
                  in the oversight structure created by Title XI—has accumulated an
                  operating surplus of almost $4 million, generated from the fees levied and
                  collected by the states on behalf of the federal government.



Recommendations   To improve its monitoring of the implementation of Title XI, we
                  recommend that the Chairman of the Appraisal Subcommittee

                  • develop and apply consistent criteria for determining and reporting
                    states’ compliance levels with Title XI requirements;

                  • explore potential options for funding or otherwise assisting states in
                    carrying out their Title XI activities, particularly the investigation of
                    complaints against appraisers; and

                  • 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.

                  To improve the process for referring problem appraisals by entities that
                  oversee or use real estate appraisals to the state appraiser agencies for
                  possible enforcement actions, we recommend that the Chairman of the
                  Appraisal Subcommittee 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.




                  Page 37                          GAO-03-404 Real Estate Appraisal Industry Oversight
Agency Comments   We requested and received written comments on a draft of this report from
                  HUD, Fannie Mae, Freddie Mac, the Appraisal Foundation, and the
                  Appraisal Subcommittee that are presented in appendixes VIII through XII.
                  In addition, we requested comments from FDIC, FRS, OCC, OTS, and
                  NCUA who indicated that their comments had been incorporated into
                  those provided by the Appraisal Subcommittee. The entities provided a
                  variety of written comments. The principal comments and our response are
                  summarized below. Technical comments have been incorporated into the
                  report where appropriate.

                  HUD concurred with our recommendation that the Chairman of the
                  Appraisal Subcommittee work with HUD, Fannie Mae, and Freddie Mac on
                  referrals of problem appraisals to states for follow-up and appropriate
                  enforcement. However, HUD pointed out that it is already involved in the
                  work of the subcommittee, as a HUD representative serves as a member of
                  the subcommittee. Our draft report noted that the six Appraisal
                  Subcommittee Board members are designated by the heads of the five
                  financial institution regulators and by HUD. Both Fannie Mae and Freddie
                  Mac expressed concern about this recommendation, commenting that they
                  are not regulatory entities. We did not intend to imply that these entities
                  have a regulatory role under Title XI. Rather, we directed the
                  recommendation to the Appraisal Subcommittee, which is responsible for
                  monitoring state activities under Title XI. However, both Fannie Mae and
                  Freddie Mac review the quality of certain appraisals for loans that they
                  purchase and can refer problematic ones to the states for action. Therefore,
                  the two government-sponsored enterprises are in a unique position to
                  provide expertise, information, and lessons of experience to the
                  subcommittee. As Fannie Mae noted in its comments, it has “extensive
                  experience in referring unacceptable appraisals to state agencies” and has
                  observed both a lack of uniformity in state processes and a lack of
                  consistent and effective enforcement actions by state licensing or
                  regulatory boards. We have revised the wording of our recommendation to
                  emphasize the role that HUD, Fannie Mae, and Freddie Mac can play in
                  helping the subcommittee carry out its oversight responsibilities.

                  Fannie Mae also commented that, based on its experience in referring
                  unacceptable appraisals, issues of format have not impeded the states from
                  taking effective enforcement action. However, as our draft report noted,
                  Appraisal Subcommittee staff involved in field reviews reported that (1)
                  referrals are often incomplete or unspecific and (2) according to state
                  officials, referrals that Fannie Mae and HUD provided to the states



                  Page 38                         GAO-03-404 Real Estate Appraisal Industry Oversight
frequently were in a format or manner that they could not readily absorb or
use. We recognize that, by itself, providing referrals in a more useful format
will not guarantee more, or more consistent, state enforcement actions.
Our draft report noted that several factors affect the extent of state
enforcement efforts, including state-level funding and staffing shortages
and a scarcity of referrals from lenders and bank regulators. However, we
continue to believe that improving the referral process could help achieve
the objectives of Title XI. As our draft report also noted, Fannie Mae has
revised its referral program to better meet state regulatory agencies’
information needs. Consequently, we did not change our recommendation.

In our draft report, we noted that we found no transparent criteria in the
subcommittee’s field review letters for the reporting of states’ compliance
with Title XI. In its comment letter, the Appraisal Subcommittee agreed
that it did not have a formalized rating system that would provide each
state with an overall rating. However, the Appraisal Subcommittee noted
that it employs “an informal [rating] system (i.e., Tier 1 and Tier 2) based on
a state’s overall compliance with Title XI.” The Appraisal Subcommittee
stated that it had previously considered developing a rating system that
would allow for comparisons across states and had concluded that such a
rating system would not assist its Title XI enforcement efforts. However,
the Appraisal Subcommittee stated in its comment letter that it would
review this issue again based on our recommendations.

Our draft report expressed a concern of the Appraisal Foundation’s two
boards (the ASB and AQB): that shortfalls in federal grant funding provided
by the Appraisal Subcommittee have limited activities that the two boards
believe enhance the quality, timeliness, and usefulness of standards and
qualifications. In commenting on our draft report, the Appraisal
Foundation clarified that federal grant shortfalls could impede the boards’
future ability to ensure that standards and qualifications continue to keep
up with changing industry conditions. Similarly, the Appraisal
Subcommittee chair commented that in the past the Appraisal Foundation
has not used all of the funds provided in the federal grants. Our draft report
noted that the foundation has other sources of revenue and that the
subcommittee expected future grants to the two boards to decline unless
the subcommittee took certain actions. We revised our report to clarify that
the two boards view federal grant funding shortfalls as a potential future
impediment to their Title XI activities.

Our draft report also characterized the Appraisal Subcommittee’s lack of
rule-making authority and limited enforcement powers as impediments to



Page 39                          GAO-03-404 Real Estate Appraisal Industry Oversight
the subcommittee’s ability to carry out its Title XI responsibilities. The
basis for this characterization was statements made by subcommittee
officials. For example, in its April 11, 2002, written responses to GAO
questions, the Appraisal Subcommittee stated,

“Federal oversight [over state appraisal authorities] could be more effective … if the ASC
were given rule-making authority, which could be used to establish mandatory state
reporting mechanisms. Finally, oversight could be strengthened if the ASC had more
administrative options when addressing noncompliant states. ... The ASC should have
additional authorities, such as ’cease and desist’ authority and monetary penalties.”

In commenting on the draft report, the Appraisal Subcommittee agreed that
general rule-making authority might facilitate its Title XI enforcement and
that its enforcement options are “limited in number.” But the
subcommittee also stated that the lack of this authority has not been an
impediment to achieving compliance. We modified our report to clarify the
Appraisal Subcommittee’s views and noted that, according to the
subcommittee, it has always been able to achieve state compliance within
the current Title XI regulatory and enforcement structure. The Appraisal
Subcommittee further noted that its policy statements are its formal
interpretations of Title XI and stated that these should be given deference,
citing a February 2000 GAO decision. In that decision, we determined that
the Appraisal Subcommittee reasonably interpreted one provision in Title
XI relating to a state’s collection and submission of appraiser fees to the
subcommittee.

In response to our recommendation that the subcommittee explore options
to assist the states in carrying out their Title XI responsibilities, the
Appraisal Subcommittee commented that while overall state compliance
with Title XI would be improved if states had more funding, it did not see
the subcommittee as the answer to that issue. The letter noted that the
Appraisal Subcommittee’s only method of obtaining additional funds to
provide to the states is to increase the national registry fee assessed against
each appraiser. We agree that the states are in a better position to identify
needs and to address fee and revenue issues to resolve those needs.
However, our recommendation addressed exploring options in addition to
providing funding to help states carry out their Title XI activities. For
example, the Appraisal Subcommittee could encourage several states to
pool investigative resources or use other options to help address temporary
shortages of trained investigators in one state. Alternatively, the Appraisal
Subcommittee could use its field review reports to identify funding gaps as
an issue negatively affecting states’ ability to comply with Title XI’s
provisions. Consequently, we did not change our recommendation.



Page 40                               GAO-03-404 Real Estate Appraisal Industry Oversight
We are sending copies of this report to the Chairman and Ranking Member
of the Senate Committee on Banking, Housing, and Urban Affairs; the
Chairman and Ranking Minority Member of the House Committee on
Financial Services; the Secretary of the Department of Housing and Urban
Development; the Chairman of the Board of Governors of the Federal
Reserve System; the Chairman of the Federal Deposit Insurance
Corporation; the Comptroller of the Currency; the Director of the Office of
Thrift Supervision; the Chairman of the National Credit Union
Administration; the Chairman and Chief Executive Officer of Fannie Mae;
the Chairman and Chief Executive Officer of Freddie Mac; the Chairman of
the Appraisal Subcommittee; and the Executive Vice President of the
Appraisal Foundation. We will also provide copies to others on request.
This report will be available at no charge on our home page at
http://www.gao.gov.

If you or your staff have any questions about this report, please contact me
at (202) 512-8678 or Harry Medina at (415) 904-2000. Key contributors are
listed in appendix XIII.




David G. Wood
Director, Financial Markets
  and Community Investments




Page 41                         GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix I

Survey of State Regulatory Agencies (results                                                                                                      Appendx
                                                                                                                                                        ies




included)                                                                                                                                          Append
                                                                                                                                                        x
                                                                                                                                                        Ii




             The U.S. General Accounting Office, an agency of the                SURVEY RESULTS
             Congress, is studying the regulation of real estate appraisers
             by the states. As part of this study, we are surveying officials
             of agencies that regulate real estate appraisers in each of the     -based on responses from 54 of 55 state
             states, territories, and the District of Columbia.                  agencies, unless otherwise stated1
             To assist us, we ask that you complete and return this              1.   Please enter the name, title, telephone number and e-mail
             questionnaire to us within the next two weeks. When                      address of the person completing this questionnaire.
             responding, you may consult with others, if you think it will
             help you give a more accurate answer. The questionnaire                  ____________________________________
             should take an hour or less to complete. The questionnaire               Name
             asks you to provide information about…
                                                                                      ____________________________________
             •   the agencies that are involved in the regulation of real             Title
                 estate appraisers in your state,
                                                                                      ____________________________________
             •   the relationship between the Appraisal Foundation and                (Area Code) Telephone Number
                 your agency,
                                                                                      ____________________________________
             •   the education and training of real estate appraisers in              e-mail address
                 your state, and

             •   the disciplinary actions your state takes when appraisers       Oversight of Real Estate Appraisers
                 are found to have committed violations.
                                                                                 Note: Agency includes Board or Commission.
             Please return the questionnaire to us in the enclosed pre-
             addressed business reply envelope. Alternatively, you may
             fax your completed questionnaire to us to the attention of          2.   Is your agency…? (Check one.)
             David Noguera on (415) 904-2111.
                                                                                      1.   [ 23 ] An independent state agency
             If you have any questions or comments about this
             questionnaire, please call David Noguera on (415) 904-2172               2.   [ 30 ] A state agency that reports to another agency
             or Harry Medina on (415) 904-2220. In the event that the
             business reply envelope is misplaced, or your fax fails to get           3.   [ 1] Other (Please specify.)
             through, please return the questionnaire to:

             U.S. General Accounting Office
             Attn: David Noguera
             301 Howard Street, Suite 1200
             San Francisco, CA 94105 - 2252




                                                                                 1
                                                                                  The one state not included in these results is the US
                                                                                 Virgin Islands, which did not complete a survey.




                         Page 42                                                GAO-03-404 Real Estate Appraisal Industry Oversight
                 Appendix I
                 Survey of State Regulatory Agencies (results
                 included)




3.    Which, if any, of the entities listed below are part of your    9.   How many years is a board or commission member’s
      organization? (Check all that apply)                                 term? (Enter number or check box.)

      1    [ 52 ] State appointed Board or Commission                      ____Md. 3________         years Or [ ] It varies

      2.   [ 53 ] Agency with state employees
                                                                      10. Are board or commission members appointed at different
      3.   [ ]    Other (Please specify.)                                 times, that is, are their terms staggered? (Check one.)

                                                                           1. [ 1 ] No
     (If you did not check choice 1, go to Question 12.)
                                                                           2.   [ 51 ]     Yes
Board of Directors or Commission

4.    Currently, how many seats are filled on your board or           11. How often does the board or commission meet? (Check
      commission? (Enter number.) BASED ON 52                             one.) RESULTS BASED ON 52 RESPONDENTS
      RESPONDENTS
                                                                           1    [ ]      Once a week or more
      ____Md. 7______ seats filled
                                                                           2.   [ 24 ] Once a month

5.    Currently, how many seats are not filled on your board               3.   [ 10 ] Once every other month
      or commission? (Enter number. If none, enter “0.”)
                                                                           4.   [ 10 ] Once every three months
      ____Av. 0.24______ seats not filled
                                                                           5.   [ 8 ] Other (Please specify.)

6.    How many current members of your board have some                                   __________________________________
      experience in the real estate profession? (Enter number.
      If none, enter “0.”)
                                                                      More Information about your Agency
      ____Md. 5___ members with real estate experience
                                                                      12. About how many full-time equivalent (FTE) staff does
                                                                          your agency devote to regulating real estate appraisers,
7.    How many members left the board or commission during                including contractors’ staff? (Enter number.)
      your most recently completed fiscal year? (Enter                RESULTS BASED ON 52 RESPONDENTS
      number. If none, enter “0.”)
                                                                           _Md. 2 Range: 28.25____ FTEs
      ___Md. 1_____        members who left the board or
                           commission
                                                                      13. Does your agency share resources with other state
                                                                          agencies? (Check one.)
8.    Currently, how many board or commission members
      receive a stipend or per diem payment for their services?            1.   [ 19 ]     No      (If “no,” go to question 15 on
      (Enter number. If none, enter “0.”)                                                          the next page.)

      ___Av. 5.52_____ members who receive a stipend or per                2.   [ 35 ]     Yes
                       diem payment




                 Page 43                                             GAO-03-404 Real Estate Appraisal Industry Oversight
             Appendix I
             Survey of State Regulatory Agencies (results
             included)




14. Which, if any, of the resources listed below does your        17. Listed below are some tasks that might be performed by
    agency share with other state agencies? (Check all that           a state agency that regulates real estate appraisers.
    apply.) PERCENTAGES BASED ON Q13                                  Which, if any, of those tasks does your agency perform?
    RESPONSES                                                         (Check all that apply.)

    1.   [ 26 ] Support staff 48%                                     1.   [ 29 ]Introducing standards for the way appraisals
                                                                                should be conducted in addition to those set by
    2.   [ 27 ] Office space 50%                                                the Appraisal Standards Board (ASB)

    3.   [ 21 ] Investigators 39%                                     2.   [ 37 ]Introducing qualifications for appraisers in
                                                                                addition to those established by the Appraisal
    4.   [ 26 ] Office equipment, such as telephones or                         Qualifications Board (AQB)
                copy machines 48%
                                                                      3.   [ 30 ] Monitoring or supervising licensed and
    5.   [ 33 ] Attorneys 61%                                              certified appraisers, for example, conducting
                                                                           unannounced investigations
    6.   [ 2 ] Other (Please specify.).4%
                                                                      4.   [ 54 ]Approving courses for appraisers’ education or
               _______________________________                                  training

                                                                      5.   [ 54 ]Enforcing state regulations concerning
15. Currently, how many appraisers are listed with your                         appraisals
    agency, excluding trainees? (Enter number.)
                                                                      6.   [ 54 ]Investigating complaints
    ___Md.1,291.5 Range: 9,345 _______ appraisers listed
                                                                      7.   [ 12 ] Other (Please specify.)
Definition
                                                                               ______________________________________
Federally related transaction refers to any real estate-
related financial transaction that (1) a federal financial
institutions regulatory agency engages in, contracts for, or
regulates; and (2) requires the services of an appraiser.

16. Of those appraisers, about what percentage are eligible to
    perform federally related transactions (FRTs)? (Enter
    the percentage.)

    _Md. 100% Range: 97_____% eligible to perform FRTs




             Page 44                                             GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




         The Appraisal Foundation

         18. Listed below are some activities conducted by the Appraisal Foundation (AF), the Appraisal Standards
             Board (ASB) and the Appraiser Qualifications Board (AQB). How effective or ineffective have each of
             those activities been at improving the quality of appraisers in your state? (Check one box in each row.)

                                                         Very         Effective    As effective     Ineffective      Very
                                                       effective                        as                        Ineffective
                                                                                   ineffective
                                                          (1)            (2)           (3)              (4)             (5)
1. Setting standards for the way appraisals should         6             29            15                4
be conducted
2. Establishing the qualifications needed to become        4             29             16              4               1
an appraiser
3. Setting requirements for appraisers’ continuing         5             22             16              9               2
education
4. Approving courses for appraisers’ education or          3             17             17              13              4
training
5. Determining the qualifications needed by                3             14             22              9               6
instructors who teach courses to appraisers
6. Other (Please specify.)                                                              1               1               2
    ________________________________

         Regulating Appraisers

         19. Typically, about how many months does it take your state to adopt the Uniform Standards of Professional
             Appraisal Practice (USPAP) after the ASB updates it? (Check one.)

              1.   [ 25 ]Less than a month

              2.   [ 13 ]1 to 3 months

              3.   [ 7 ] 4 to 6 months

              4.   [ 1 ] 7 to 9 months

              5.   [ 3 ] 10 to 12 months

              6.   [ 5 ] More than 12 months


         20. Is your agency or the state legislature responsible for adopting USPAP? (Check one.)
             RESULTS BASED ON 50 RESPONDENTS

              1.   [ 35 ]Our agency

              2.   [ 15 ]The state legislature




            Page 45                                                GAO-03-404 Real Estate Appraisal Industry Oversight
         Appendix I
         Survey of State Regulatory Agencies (results
         included)




      21. Listed below are some suggestions for possible changes in the ways real estate appraisers are regulated.
          Considering each suggested change separately, please indicate whether that change would help or hinder your
          state’s ability to regulate appraisers. (Check one box in each row.)

                                               Would this change help or hinder your state’s ability to regulate appraisers?
                                             Help greatly       Help         Help as much          Hinder            Hinder
                                                             somewhat          as hinder         somewhat            greatly
                                                 (1)             (2)              (3)                 (4)              (5)
1. Eliminating the oversight role                13              11               15                   9                6
    presently carried out by the Federal
    Financial Institutions Examination
    Council (FFIEC)
2. Eliminating the oversight role                 13                9               15                 12              5
    presently carried out by the
    Appraisal Subcommittee (ASC)
3. Updating the USPAP less                        24               14               13                 1               2
    frequently
4. Eliminating the ASB’s role in                  4                 6               13                 18              13
    establishing minimum standards for
    appraisals
5. Eliminating the AQB’s role in                  10               11               10                 13              10
    setting minimum qualifications for
    appraisers
6. Placing representatives of state               20               14               12                 3               5
    government on the ASC’s board
7. Placing representatives of state               20               13               12                 4               5
    government on the AQB
8. Placing representatives of state               18               12               15                 4               5
    government on the ASB
9. Opening the meetings of the ASC,               23               13               15                 1               2
    AQB and ASB to the public
10. Other (Please specify.)                       7
    a._______________________
                                                  2
    b._______________________


      22. Which, if any, of the actions listed below are needed by your agency to improve its ability to regulate appraisers?
          (Check all that apply.)—RESULTS BASED ON 49 RESPONDENTS

          1.   [ 33 ]    Increasing the funding needed to conduct investigations

          2.   [ 37 ]    Increasing the staff needed to conduct investigations

          3.   [ 16 ]    Notifying lenders of appraisers who have violated regulations

          4.   [ 26 ]    Hiring more investigators with experience conducting real estate appraisals

          5.   [ 22 ]    Increasing the amount of resources needed to support the litigation process

          6.   [ 24 ]    Processing complaints in a more timely fashion

          7.   [9]      Other (Please specify.)

                     _____________________________________________________________________________




         Page 46                                                  GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




Temporary Licenses and Reciprocity                                 25. Listed below are some limitations that might be attached
                                                                       to a temporary license for an appraiser. Which, if any, of
23. How much is the fee for a temporary license to conduct             those limitations are attached to a temporary license in
    appraisals in your state? (Check one.)                             your state? (Check all that apply.)

    1. [ 3 ] No fee                                                    1. [ 41 ]     The temporary license can be used for only
                                                                            one assignment
    2.   [ 13 ]   $50 or less
                                                                       2.   [ 16 ] An appraiser can be issued only one
    3.   [ 14 ]   $51 to $100                                                    temporary license at a time

    4.   [ 23 ]   $101 to $150                                         3.   [ 15 ] Only a limited number of temporary
                                                                            licenses can be issued to an appraiser within a given
    5.   [ 1 ] More than $150                                                    year

                                                                       4.   [ 1 ] Appraisers holding such licenses must have an
24. Which, if any, of the actions listed below are required of                    appraiser permanently licensed in our state sign
    applicants for temporary licenses to conduct appraisals in                    off on the appraisal(s)
    your state? (Check all that apply.)
    RESULTS BASED ON 53 RESPONDENTS                                    5.   [ 5 ] Other (Please specify.)

    1. [ 37 ]     Disclose all criminal convictions                             ____________________________________

    2.   [ 46 ] Reveal all disciplinary actions taken                  6.   [ 4 ] None of the above
         against them by government entities

    3. [ 52 ]     Agree to abide by all of the rules set by our    26. Consider the temporary license issued to an appraiser in
             state for appraisals                                      your state. What is the maximum period of time such a
                                                                       license would be valid? (Check one.)
    4.   [ 43 ] Agree to cooperate with any investigation              RESULTS BASED ON 53 RESPONDENTS
              initiated by our state
                                                                       1.   [ ] 30 days or less

                                                                       2.   [ 1 ] 31 to 60 days

                                                                       3.   [ 3 ] 61 to 90 days

                                                                       4.   [ ] 91 to 120 days

                                                                       5.   [ ] 121 to 150 days

                                                                       6.   [ 20 ] 151 – 180 days

                                                                       7.   [ 9 ] More than 180 days

                                                                       8.   [ 20 ] Good for the duration of the assignment




            Page 47                                               GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




27. Consider an individual who resides in another state and         30. Listed below are some conditions that might have to be
    is issued a temporary license to conduct appraisals in              met for a state to use an appraiser’s license from another
    your state. Suppose that individual commits a violation             state as the sole basis for granting a license. Which, if
    in your state that warrants disciplinary actions.                   any, of those conditions have to be met in your state?
                                                                        (Check all that apply.) 47 STATES ELIGIBLE TO
    Which, if any, of the actions listed below would your               ANSWER THIS QUESTION, ONLY 46 DID
    state take? (Check all that apply.)
                                                                        1.   [ 32 ] The appraiser from another state must agree
    1.   [ 52 ]     Our state would take disciplinary action                      in writing to follow all the regulations
                                                                                  established by our state
    2.   [ 26 ] Our state would refer the matter to the state in
              which the individual resides for disciplinary             2.   [ ] The appraiser’s license must be issued by a
              action                                                             state that shares geographic borders with our
                                                                                 state

28. In your state, about how many business days does it take            3.   [ 23 ] Our state must have a reciprocity agreement
    to issue a temporary license after the application is                         with the state that issued the original license,
    completed? (Check one.)                                                       that is, the state from which the license
                                                                                  originates must be willing to accept an
    1.   [ 10 ] Less than one business day                                        appraiser’s license from our state as the sole
                                                                                  basis for granting a license
    2.   [ 22 ] 1 to 2 business days
                                                                        4.   [ ] The appraiser must state that he or she will be
    3    [ 6 ] 3 to 4 business days                                              performing continuous appraisals in our state

    4.   [ 12 ] 5 to 6 business days                                    5.   [ 38 ] The requirements for the appraiser’s current
                                                                                  license must meet or exceed those of the AQB
    5.   [ 4 ] More than 6 business days
                                                                        6.   [ 42 ] The appraiser from another state must pay
                                                                                  licensing or certification fees that are
29. Is an appraiser’s license from another state ever used as                     comparable to in-state appraisers
    the sole basis for granting a license in your state?
    (Check one.)                                                        7.   [ 8 ] The appraiser from another state must consent
                                                                                   to a background check
    1.   [ 7 ] No     (If “no,” go to question 31 on the
                      next page.)                                       8.   [ 19 ] Other (Please specify.)

    2.   [ 47 ] Yes                                                              ____________________________________




            Page 48                                                GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




Education and Training of Appraisers                             34. Listed below are some difficulties officials might have
                                                                     with using distance education as a part of the training of
31. To which, if any, of the institutions listed below are           real estate appraisers. Which, if any, of those difficulties
    educational providers required to pay a fee in order to          do you have with using distance education as a part of
    have their courses approved in your state? (Check all            the training of real estate appraisers? (Check all that
    that apply.)                                                     apply.)
                                                                     RESULTS BASED ON 51 RESPONDENTS
    1.   [ 9 ] Appraiser Qualifications Board (AQB)
                                                                     1.   [ 16 ] Have no difficulties using distance education
    2.   [ 10 ] College or University
                                                                     2.   [ 23 ] Does not offer enough personal contact with
    3.   [ 7 ] American Council on Education                                   instructors

    4.   [ 9 ] International Distance Education Certification        3.   [ 8 ] Accreditation standards are not as high as for
               Center                                                          classroom-based education

    5.   [ 24 ] Our agency                                           4.   [ 17 ] Other (Please specify.)

    6    [ 5 ] Other (Please specify.)                           Agency Revenues, Expenses and Resources

         ___________________________________                     Definition

    7.   [ 17 ] None of the above                                Revenues are funds collected through fees, fines and
                                                                 penalties.

32. Consider the qualifications required by the AQB for          35. Is your agency funded entirely by revenues, entirely by
    appraisers who conduct FRTs involving single-family              appropriations from your state, or through a combination
    residential properties. How adequate or inadequate are           of both? (Check one.)
    those qualifications to ensure that appraisers perform           RESULTS BASED ON 53 RESPONDENTS
    those kinds of FRTs competently? (Check one.)
                                                                     1.   [ 35 ] Entirely by revenues
    1.   [ 31 ] Adequate
                                                                     2.   [ 12 ] Entirely by state appropriations
    2.   [ 14 ] Undecided
                                                                     3.   [ 5 ] By both revenues and state appropriations
    3.   [ 9 ] Inadequate
                                                                     4.   [ 1 ] Other (Please specify.)

Definition
Distance education refers to education in which there is a           RESULTS FOR Q36 & Q37 ARE BASED ON 46
separation in time or place between instructor and student.          RESPONDENTS
                                                                 36. What was the total amount of funds available to your
33. In your opinion, to what extent is distance education            agency in your most recently completed fiscal year?
    currently being used as a part of the training of real           (Enter amount.)
    estate appraisers? (Check one.)
RESULTS BASED ON 53 RESPONDENTS                                      $ Md. 281,000 Range: 17.2 million funds available in
                                                                     your most recently completed fiscal year
    1.   [ 1 ] To a very great extent

    2.   [ 1 ] To a great extent                                 37. What were your agency’s total expenses in your most
                                                                     recently completed fiscal year? (Enter amount.)
    3.   [ 15 ] To a moderate extent
                                                                     $ Md. 302,000 Range: 13.2 million expenses in your
    4.   [ 26 ] To some extent                                       most recently completed fiscal year

    5.   [ 10 ] To little or no extent




            Page 49                                             GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




38. In your opinion, how sufficient or insufficient is each of         42. Consider the number of complaints your agency received
    the dimensions listed below in enabling your agency to                 against appraisers in the last calendar year. About what
    meet its regulatory responsibilities? (Check one box in                percentage of those complaints were received from each
    each row.)                                                             of the types of institutions or individuals listed below?
                                                                           (Enter the percentages.) RESULTS BASED ON 49
                      Sufficient      Undecided        Insufficient        RESPONDENTS
                         (1)             (2)               (3)
1. Its current           18               9                27              _Md. 0% Range: 40% from banking regulators
   staff size
2. Its current            25               15              14              _Md. 5% Range: 85% from banks and thrifts
   resources,
   other than                                                              _Md. 10% Range: 55% from Fannie Mae, Freddie Mac
   staff                                                                                      or similar institutions
3. Its current            41               6                7
   regulatory                                                              _Md. 30% Range: 95% from consumers
   authority
                                                                           _Md. 20% Range: 88% from other appraisers

Automated Valuation Models (AVMs)                                          _Md. 1% Range: 10% from real estate agents

39. Of all of your state’s real estate transactions in the last            _Md. 6% Range: 50% from mortgage brokers
    calendar year, about what percentage were
    conducted…(Enter the percentages or check the box.)                    _Md. 10.5% Range: 40% from others
RESULTS BASED ON 53 RESPONDENTS                                                   100%
                                                  %
    using AVMs?                                                        43. Again consider the number of complaints your agency
    using appraisals?                                                      received against appraisers in the last calendar year. Of
    using evaluations?                                                     those complaints, what percentage resulted in…
    Don’t know                                     93                      RESULTS BASED ON 46 RESPONDENTS
                                                       100%
                                                                                                                             %
                                                                           referrals to other state agencies for action?   Md. 0
Complaints Against Appraisers                                                                                              Range: 15
                                                                           investigations that are still open?             Md. 30
40. In the last calendar year, about how many complaints                                                                   Range: 97
    against appraisers did your agency receive? (Enter                     investigations that have been resolved?         Md. 63.5
    number.)                                                                                                               Range: 99
                                                                                                                            100%
    ___Md. 47.5 Range: 430__ complaints
                                                                       44. In the last calendar year, was the number of complaints
                                                                           against appraisers in your state greater than, about the
                                                                           same as, or fewer than the number of complaints in
41. Of those complaints, about what percentage were against                calendar year 1999? (Check one.)
    appraisers who were not listed with your agency? (Enter                RESULTS BASED ON 51 RESPONSES
    the percentage.) RESULTS BASED ON 52
    RESPONDENTS                                                            1.   [ 12 ]   Far greater than in calendar year 1999

    _____Md. 0.5% Range: 100____% complaints against                       2.   [ 16 ]   Greater than in calendar year 1999
    unlisted appraisers
                                                                           3.   [ 11 ]   About the same as in calendar year 1999

                                                                           4.   [ 11 ]   Fewer than in calendar year 1999

                                                                           5.   [ ] Far fewer than in calendar year 1999

                                                                           6.   [ 1 ] Don’t know




            Page 50                                                   GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




Disciplinary Actions
                                                                    49. Consider the number of disciplinary actions taken by
45. In the last calendar year, was the number of violations of          your state against appraisers in the last calendar year. Of
    regulations by appraisers in your state greater than, about         those actions, about what percentage were not reported
    the same as, or fewer than the number of violations in              to the ASC? (Enter the percentage.) 13 ELIGIBLE TO
    calendar year 1999? (Check one.) RESULTS BASED                      RESPOND, BUT ONLY 11 DID
    ON 50 RESPONDENTS
                                                                    __Md. 33 Range: 100___% of actions not reported to ASC
    1.   [ 7 ] Far greater than in calendar year 1999

    2.   [ 18 ]   Greater than in calendar year 1999                50. Now consider those actions taken by your state against
                                                                        appraisers in the last calendar year that were not reported
    3.   [ 15 ]   About the same as in calendar year 1999               to the ASC. About what percentage were… (Enter the
                                                                        percentages.) 13 ELIGIBLE TO RESPOND, BUT
    4.   [ 8 ] Fewer than in calendar year 1999                         ONLY 11 DID
                                                                                                                        %
    5.   [ 1 ] Far fewer than in calendar year 1999                     required periods of education?          Md. 70 Range: 80
                                                                        letters of warning or admonition?       Md. 85 Range: 90
    6.   [ 1 ] Don’t know                                               probationary periods?                   Md. 70 Range: 60
                                                                        suspensions?                            Md. 0 Range: 39
                                                                        monetary fines?                         Md. 33 Range: 90
46. Which, if any, of the types of actions listed below does            revocations of licenses or              Md. 0 Range: 28
    your state take when appraisers commit violations?                  certifications?
    (Check all that apply.) RESULTS BASED ON 53                         other? (Please specify.)                Md. 75 Range: 50
    RESPONDENTS
                                                                        ________________________
                                                                                                                       100%
    1.   [ 50 ]   Require more education 93%
                                                                    51. Does your state have a statute that prevents your agency
    2.   [ 46 ]   Issue letters of warning or admonition 85%
                                                                        from reporting to the ASC certain types of disciplinary
                                                                        actions taken against appraisers? (Check one.)
    3.   [ 36 ]   Place appraisers on probation 67%

    4.   [ 50 ]   Place appraisers on suspension 93%                    1.   [ 12 ]      No    (If “no,” go to question 54 on
                                                                                               the next page.)
    5.   [ 40 ]   Impose monetary fines 74%
                                                                        2.   [ 1 ] Yes
    6.   [ 52 ] Revoke appraisers’ licenses or
              certifications 96%                                    52. In the space below, please cite the number and name of
                                                                        that statute. (Enter code, number or name.) 1 STATE
    7.   [ 13 ] Other (Please specify.) 24%                             ANSWERED THIS QUESTION

47. In the last calendar year, about how many disciplinary              Statute #     _________________________
    actions did your state take against appraisers found to
    have committed violations? (Enter number.) RESULTS                  Name of Statute __________________________
    BASED ON 52 RESPONDENTS

    __Md. 11.5 Range:245__________ disciplinary actions             53. Again consider those actions taken by your state against
                                                                        appraisers in the last calendar year that were not reported
48. Does your state report all the disciplinary actions it takes        to the ASC. Of those actions, about what percentage
    against appraisers to the ASC? (Check one.) RESULTS                 were not reported because of that law? (Enter the
    BASED ON 52 RESPONDENTS                                             percentage.) 1 STATE ANSWERED THIS QUESTION

    1.   [ 39 ]    Yes      (If “yes,” go to question 54 on             Md. 5 Range: 0% of actions not reported to ASC
                                                                                      because of that law
                            the next page.)

    2.   [ 13 ]   No




            Page 51                                                GAO-03-404 Real Estate Appraisal Industry Oversight
            Appendix I
            Survey of State Regulatory Agencies (results
            included)




ASC and the National Registry                                         56. If you have any comments about the current appraiser
                                                                          regulatory system, or any other topics mentioned in this
54. Is the ASC’s current fee for enrolling in the National                questionnaire, please write or type them below or on a
    Registry too high, about right, or too low? (Check one.)              separate piece of paper. 22 STATES PROVIDED
    RESULTS BASED ON 53 RESPONDENTS                                       COMMENTS

    1.   [ 20 ] Too high

    2.   [ 22 ] About right

    3.   [ ] Too low

    4.   [ 11 ]   Don’t know


55. Listed below are some ways in which state real estate
    regulatory agencies might make use of the National
    Registry. In which, if any, of those ways does your
    agency make use of the National Registry? (Check all
    that apply.)
    RESULTS BASED ON 53 RESPONDENTS

    1.   [ 44 ] To find out if disciplinary actions were taken
              against an appraiser in other states

    2.   [ 44 ] To verify that applicants from other states
              are licensed or certified in those states

    3.   [ 40 ] To notify other states and the ASC of
              appraisers against whom disciplinary actions
              have been taken in our state

    4.   [ 2 ] Other (Please specify.)

             ______________________________________

    5.   [ 3 ] We do not use the registry




                                                  Thank you for your cooperation




            Page 52                                                GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix II

Scope and Methodology                                                                            Appendx
                                                                                                       Ii




              To describe the specific responsibilities under Title XI of the private, state,
              and federal entities that oversee the real estate appraisal industry, we
              reviewed Title XI and its legislative history to identify the specific
              responsibilities assigned to each entity. We interviewed representatives of
              private entities and federal officials and surveyed state regulatory agencies
              to obtain information on how they interpreted their responsibilities under
              Title XI. In addition, we attended a conference sponsored by an association
              of state regulatory agencies on the agencies’ role in Title XI’s oversight
              structure. Finally, we reviewed the literature, issue papers, and documents
              by industry participants, experts, and observers on Title XI and the
              regulatory structure for appraisers.

              To describe how the entities carry out their duties under Title XI, we:

              • obtained information from the Appraisal Foundation and its two boards,
                the Appraisal Standards Board and the Appraiser Qualifications Board
                on Title XI-related activities such as (1) submitting grant proposals to
                the Appraisal Subcommittee for Title XI-related activities, (2) providing
                information to the Appraisal Subcommittee on Title XI-related activities,
                (3) establishing minimum standards for conducting appraisals and
                qualifications for appraisers, and (4) disseminating information on
                revisions to these standards and qualifications.

              • surveyed the 55 state regulatory agencies for appraisers to gather
                information on the agencies’ organizational structures, specific tasks,
                staff size, licensing and certification practices and fees, revenues and
                expenditures, and complaint and enforcement activity. We also analyzed
                survey results to determine whether any trends existed or significant
                issues were reported.

              • obtained and reviewed federal financial regulators’ policies, procedures,
                regulations, and advisory opinions with respect to oversight of the
                appraisal industry and information on enforcement activities related to
                complaints and referrals arising from noncompliance with the Uniform
                Standards of Professional Appraisal Practice or Title XI.

              • obtained and reviewed Appraisal Subcommittee annual reports, state
                field review reports, and grants to the Appraisal Foundation. We also
                performed selected analyses of information contained in the Appraisal
                Subcommittee’s National Registry of Appraisers database.




              Page 53                          GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix II
Scope and Methodology




To describe factors that private, state, and federal entities identified as
impediments to carrying out their Title XI roles and responsibilities, we
interviewed officials representing the various entities. In addition, we
analyzed the results of our survey of state regulatory agencies, contacted
several state officials about the written comments included in their survey
responses, and reviewed correspondence and an agency newsletter we
received from state regulatory officials.

To describe and identify other concerns about the effectiveness of the
current regulatory structure in achieving the purposes of Title XI, we
interviewed officials representing regulatory entities, industry participants,
and industry observers. Specifically, we interviewed (1) private and federal
entities cited in Title XI; (2) officials from the Department of Housing and
Urban Development, Fannie Mae, and Freddie Mac; and (3) groups
representing mortgage lenders, appraisers, appraiser education providers,
and academic experts on issues related to appraisals. We also reviewed
congressional hearings and prior GAO reports on appraisal reform and
federal and state regulatory objectives. Finally, we downloaded
information on appraisal issues from the Internet, including
correspondence, reports, and issue papers prepared by industry
participants and observers.

We performed our work from March 2002 through March 2003 in
accordance with generally accepted government auditing standards.




Page 54                          GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix III

List of Agencies and Groups Contacted                                                                    Appendx
                                                                                                               iI




Federal Agencies        • Appraisal Subcommittee of the Federal Financial Institutions
                          Examination Council (ASC)
                          http://www.asc.gov/

                        • Board of Governors of the Federal Reserve System (FRB)
                          http://www.federalreserve.gov/

                        • Federal Deposit Insurance Corporation (FDIC)
                          http://www.fdic.gov/

                        • National Credit Union Administration (NCUA)
                          http://www.ncua.gov/

                        • Office of the Comptroller of the Currency (OCC)
                          http://www.occ.treas.gov/

                        • Office of Thrift Supervision (OTS)
                          http://www.ots.treas.gov/

                        • United States Department of Housing and Urban Development (HUD)
                          http://www.hud.gov/



Government              • Federal National Mortgage Association (Fannie Mae)
                          http://www.fanniemae.com/
Sponsored Enterprises
                        • Federal Home Loan Mortgage Corporation (Freddie Mac)
                          http://www.freddiemac.com/



Private Organizations   • American Bankers Association (ABA)
                          http://www.aba.com/default.htm

                        • American Society of Appraisers (ASA)
                          http://www.appraisers.org/

                        • Appraisal Foundation (AF)
                          http://www.appraisalfoundation.org/

                        • Appraisal Institute (AI)
                          http://www.appraisalinstitute.org/


                        Page 55                        GAO-03-404 Real Estate Appraisal Industry Oversight
                      Appendix III
                      List of Agencies and Groups Contacted




                      • Experian
                        http://www.experian.com/consumer/index.html

                      • FNC Inc.
                        http://www.fncinc.com/

                      • International Association of Assessing Officers (IAAO)
                        http://www.iaao.org/

                      • Lee and Grant Company
                        http://www.leeandgrant.com/

                      • Mortgage Bankers Association of America (MBA)
                        http://www.mbaa.org/

                      • National Association of Realtors (NAR)
                        http://www.realtor.org/rodesign.nsf/pages/HomePage?OpenDocument

                      • Peter S. Barash Associates

                      • UC Berkeley Fisher Center for Real Estate and Urban Economics
                        http://groups.haas.berkeley.edu/realestate/Fisher/fisherinfo.asp



State Appraiser       • Alabama Real Estate Appraisers Board
                        http://reab.state.al.us
Regulatory Agencies
                      • Alaska Board of Certified Real Estate Appraisers
                        http://www.dced.state.ak.us/occ/papr.htm

                      • Arizona Board of Appraisal
                        http://www.appraisal.state.az.us

                      • Arkansas Appraiser Licensing & Certification Board
                        http://www.state.ar.us/alcb

                      • California Office of Real Estate Appraisers
                        http://www.orea.ca.gov

                      • Colorado Board of Real Estate Appraisers
                        http://www.dora.state.co.us/real-estate/appraisr/appraisr.htm




                      Page 56                                 GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix III
List of Agencies and Groups Contacted




• Commonwealth of the Northern Mariana Islands

• Connecticut License Services Division
  http://www.dcp.state.ct.us/licensing/realestate.htm

• Delaware Council on Real Estate Appraisers
  http://www.state.de.us/research/profreg/realesapp.htm

• District of Columbia, Occupational & Professional Licensing
  Administration
  Offline: 12/19/02 http://www.dcra.org/bplaboards.shtm

• Florida Division of Real Estate
  http://www.state.fl.us/dbpr/re/freab_welcome.shtml

• Georgia Real Estate Appraisers Board
  http://www2.state.ga.us/grec/greab/greabmain.html

• Guam Department of Revenue & Taxation

• Hawaii Real Estate Appraisers Section
  http://www.state.hi.us/dcca/pvl/areas_real_estate_appraiser.html

• Idaho State Certified Real Estate Appraisers Board
  http://www2.state.id.us/ibol/rea.htm

• Illinois Office of Banks and Real Estate, Appraisal Division
  http://www.obre.state.il.us/REALEST/APPRAISAL.HTM

• Indiana Real Estate Appraiser Licensure & Certification Board
  http://www.in.gov/pla/bandc/appraiser/

• Iowa Real Estate Appraiser Examining Board
  http://www.state.ia.us/government/com/prof/realappr.htm

• Iowa Real Estate Appraiser Examining Board
  http://www.state.ia.us/government/com/prof/realappr.htm

• Kansas Real Estate Appraisal Board
  http://www.ink.org/public/kreab/




Page 57                                 GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix III
List of Agencies and Groups Contacted




• Kentucky Real Estate Appraisers Board
  http://www.kyappraisersboard.com

• Louisiana Real Estate Commission
  http://www.lreasbc.state.la.us/

• Maine Board of Real Estate Appraisers
  http://www.state.me.us/pfr/olr/categories/cat37.htm

• Maryland Commission of Real Estate Appraisers & Home Inspectors
  http://www.dllr.state.md.us/license/occprof/reappr.html

• Massachusetts Board of Registration of Real Estate Brokers &
  Salespeople
  http://www.state.ma.us/reg/boards/ra/default.htm

• Michigan Board of Real Estate Appraisers
  http://www.michigan.gov/commerciallicensing

• Minnesota Department of Commerce
  http://www.state.mn.us/cgi-
  bin/portal/mn/jsp/home.do?agency=Commerce

• Mississippi Real Estate Appraiser Licensing & Certification Board
  http://www.mrec.state.ms.us/

• Missouri Real Estate Appraisers Commission
  http://www.ded.state.mo.us/regulatorylicensing/professionalregistration
  /rea

• Montana Department of Labor & Industry, Business Standards Division
  http://discoveringmontana.com/dli/bsd/license/bsd_boards/rea_board/b
  oard_page.htm

• Nebraska Real Estate Appraiser Board
  http://linux1.nrc.state.ne.us/appraiser

• Nevada Real Estate Division
  http://www.red.state.nv.us

• New Hampshire Real Estate Appraiser Board
  http://www.state.nh.us/nhreab/



Page 58                                 GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix III
List of Agencies and Groups Contacted




• New Jersey Board of Real Estate Appraisers
  http://www.state.nj.us/lps/ca/nonmed#real11

• New Mexico Real Estate Appraisers Board
  http://www.rld.state.nm.us/b&c/real_estate_appraisers_board.htm

• New York Division of Licensing Services
  http://www.dos.state.ny.us/lcns/appraise.html

• North Carolina Appraisal Board
  http://www.ncappraisalboard.org

• North Dakota Real Estate Appraiser Qualifications & Ethics Board
  http://www.governor.state.nd.us/boards/boards-query.asp?Board_ID=92

• Ohio Division of Real Estate
  http://www.com.state.oh.us/odoc/real/appmain.htm

• Oklahoma Real Estate Appraiser Board Division
  http://www.oid.state.ok.us/agentbrokers/realestate.html

• Oregon Appraiser Certification & Licensure Board
  http://www.oregonaclb.org

• Pennsylvania State Board of Certified Real Estate Appraisers
  http://www.dos.state.pa.us/bpoa/cwp/view.asp?a=1104&q=432589

• Puerto Rico Department of State Board of Examiners Division
  no website

• Rhode Island Division of Commercial Licensing & Regulation
  http://www.dbr.state.ri.us/real_estate.html

• South Carolina Professional & Occupational Licensing Real Estate
  Appraisers Board
  http://www.llr.state.sc.us/POL/RealEstateAppraisers/

• South Dakota Appraiser Certification Program
  http://www.state.sd.us/dcr/appraisers/appraiser.html

• Tennessee Real Estate Appraiser Commission
  http://www.state.tn.us/commerce/treac



Page 59                                 GAO-03-404 Real Estate Appraisal Industry Oversight
                      Appendix III
                      List of Agencies and Groups Contacted




                      • Texas Appraiser Licensing & Certification Board
                        http://www.talcb.state.tx.us/

                      • US Virgin Islands Department of Licensing & Consumer Affairs

                      • Utah Division of Real Estate
                        http://www.commerce.utah.gov/dre

                      • Vermont Board of Real Estate Appraisers
                        http://vtprofessionals.org/opr1/appraisers/

                      • Virginia Real Estate Appraiser Board
                        http://www.state.va.us/dpor/apr_main.htm

                      • Washington Department of Licensing, Real Estate Appraisers
                        http://www.wa.gov/dol/bpd/appfront.htm

                      • West Virginia Real Estate Appraiser Licensing and Certification Board
                        http://www.state.wv.us/appraise

                      • Wisconsin Department of Regulation & Licensing
                        http://www.drl.state.wi.us

                      • Wyoming Certified Real Estate Appraiser Board
                        http://realestate.state.wy.us



Private Consultants   • Lewis Allen, Consultant, Automated Valuation Models

                      • Walt Humphrey, IFAC, Humphrey and Associates, Inc.




                      Page 60                                 GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix IV

National Registry Database of the Appraisal
Subcommittee                                                                                                Appendx
                                                                                                                  iIV




               Title XI requires the Appraisal Subcommittee to maintain a national
               registry of state-licensed and -certified appraisers eligible to perform
               appraisals in connection with federally related transactions. The National
               Registry database, created in 1992 and revised and updated in 1997,1
               provides names and qualifications of appraisers in each state and statistics
               on, among other things, active and inactive licenses, types of licenses, and
               disciplinary actions. The database contains both public and nonpublic
               information—for example, some data on disciplinary actions are restricted
               to authorized representatives of state regulatory agencies. Users can
               access the database from the Internet and may download the entire public
               portion at no charge.

               According to the Appraisal Subcommittee’s 2001 annual report, the registry
               is designed to allow users to determine (1) whether an appraiser is eligible
               to perform appraisals in connection with federally related transactions and
               (2) whether the appraiser’s credentials have ever been suspended, revoked,
               or surrendered. The registry helps in facilitating temporary reciprocity by
               allowing states to determine an appraiser’s licensing status and assists state
               agencies in enforcing laws governing appraisers. In addition, financial
               institutions can receive updates via the Internet on revocations,
               suspensions, surrenders, and expirations of licenses.

               Information contained in the database comes from the states, which
               periodically submit files to the Appraisal Subcommittee for inclusion in the
               registry, with most states submitting data monthly. The registry reports on
               four classes of appraisers—licensed, certified general, certified residential,
               and transitional. According to an Appraisal Subcommittee official, the
               database also serves as an archive, as no records are ever deleted. Our
               research showed that nearly one-half of the appraisers included in the
               database were classified as inactive because of retirements, death,
               departure from the profession, or other reasons. Some appraisers were



               1
                According to an Appraisal Subcommittee official, results from their on-site state review
               conducted in the mid-1990s found that the number of appraisers many states reported to the
               Appraisal Subcommittee did not correspond to the number of appraisers in the state's
               records. In response, the Appraisal Subcommittee made two changes to the National
               Registry database to ensure that states were submitting the names of and collecting fees on
               behalf of all eligible appraisers. First, the Appraisal Subcommittee required states to submit
               records for all real property appraisers and determined whether any fees were outstanding.
               Second, the Appraisal Subcommittee redesigned the database to calculate the fees owed by
               each state, including for creating and mailing invoices. According to the official, revenues
               for the registry increased significantly as a result of the changes.




               Page 61                                GAO-03-404 Real Estate Appraisal Industry Oversight
                                          Appendix IV
                                          National Registry Database of the Appraisal
                                          Subcommittee




                                          listed as both active and inactive, since they had given up one type of
                                          license and obtained another kind.

                                          As of October 31, 2002, the database reported nearly 89,000 appraisers
                                          eligible to perform appraisals for federally related transactions. The
                                          number of appraisers reported by state appraisal regulatory agencies
                                          ranged from 10 in the Northern Mariana Islands to nearly 9,500 in California
                                          (table 3). Certified general and certified residential appraisers accounted
                                          for nearly 76 percent of the licensed appraisers.



Table 3: Active Appraiser Licenses, by State and Type

                                                                 Type of license
                                                             Certified             Certified        Transitional
                                           Licensed           general            residential            license                 All
Issuing states
and U.S. territories                                N                N                     N                   N          Number
                                                                                                                a
Alabama                                          113               420                   510                                 1,043
                                                     a                                                          a
Alaska                                                              70                    82                                   152
                                                                                                                a
Arizona                                          424               568                   626                                 1,618
                                                                                                                a
Arkansas                                         113               343                   314                                   770
                                                                                                                a
California                                     2,124             3,395                  3,936                                9,455
                                                                                                                a
Colorado                                         737             1,092                   971                                 2,800
                                                                                                                a
Connecticut                                         31             505                   583                                 1,119
                                                                                                                a
Delaware                                            61             169                   214                                   444
                                                                                            a                   a
District of Columbia                             327               212                                                         539
                                                                                                                a
Florida                                          105             1,944                  2,824                                4,873
                                                                                                                a
Georgia                                        1,034             1,430                   894                                 3,358
                                                                                                                a
Guam                                                 9              10                     3                                    22
                                                                                                                a
Hawaii                                              22             131                   150                                   303
                                                                                                                a
Idaho                                            191               221                   133                                   545
                                                                                                                a
Illinois                                       2,342             1,037                  1,768                                5,147
                                                                                                                a
Indiana                                          829               528                   728                                 2,085
                                                     a                                                          a
Iowa                                                               528                   485                                 1,013
                                                                                                                a
Kansas                                           261               419                   328                                 1,008
                                                                                                                a
Kentucky                                            90             448                   698                                 1,236
                                                     a                                                          a
Louisiana                                                          340                   556                                   896
                                                                                                                a
Maine                                            103               268                   214                                   585




                                          Page 62                               GAO-03-404 Real Estate Appraisal Industry Oversight
                                 Appendix IV
                                 National Registry Database of the Appraisal
                                 Subcommittee




(Continued From Previous Page)
                                                        Type of license
                                                    Certified             Certified        Transitional
                                  Licensed           general            residential            license                 All
Issuing states
and U.S. territories                       N                N                     N                   N          Number
                                                                                                       a
Maryland                                820               724                   780                                 2,324
                                                                                                       a
Massachusetts                           524               675                   726                                 1,925
                                                                                                       a
Michigan                              2,074               987                    73                                 3,134
                                                                                                       a
Minnesota                               148               790                   835                                 1,773
                                                                                                       a
Mississippi                             344               451                   406                                 1,201
                                                                                                       a
Missouri                                247               616                   994                                 1,857
                                                                                                       a
Montana                                    42             225                   140                                   407
                                                                                                       a
Nebraska                                120               344                   110                                   574
                                                                                                       a
New Hampshire                           115               288                   296                                   699
                                                                                                       a
New Jersey                              674               987                   648                                 2,309
                                                                                                       a
New Mexico                                 62             249                   221                                   532
                                                                                                       a
Nevada                                  160               319                   263                                   742
                                                                                                       a
New York                                388             1,440                  1,811                                3,639
                                                                                                       a
North Carolina                          169               678                  1,435                                2,282
                                                                                   a                   a
North Dakota                               59             117                                                         176
                                            a                                                          a
Northern Mariana Islands                                    9                     1                                    10
                                                                                                       a
Ohio                                  1,684               863                   543                                 3,090
                                                                                                       a
Oklahoma                                564               389                   361                                 1,314
                                                                                                       a
Oregon                                  686               471                   151                                 1,308
                                            a                                                          a
Pennsylvania                                            1,150                  1,777                                2,927
                                                                                                       a
Puerto Rico                                 9             148                    40                                   197
                                                                                                       a
Rhode Island                               69             143                   183                                   395
                                                                                                       a
South Carolina                          434               560                   626                                 1,620
                                                                                                       a
South Dakota                               66             137                    16                                   219
                                                                                                       a
Tennessee                               203               553                   747                                 1,503
Texas                                   375             2,161                  1,787                 36             4,359
                                                                                                       a
Utah                                       99             325                   563                                   987
                                                                                                       a
Vermont                                    49             116                   101                                   266
                                            a                                                          a
Virgin Islands                                             11                     9                                    20
                                                                                                       a
Virginia                                787               855                   871                                 2,513
                                                                                                       a
Washington                              391               845                  1,201                                2,437
                                                                                                       a
West Virginia                           169               161                   190                                   520
                                                                                                       a
Wisconsin                               556               606                   872                                 2,034




                                 Page 63                               GAO-03-404 Real Estate Appraisal Industry Oversight
                                                                   Appendix IV
                                                                   National Registry Database of the Appraisal
                                                                   Subcommittee




(Continued From Previous Page)
                                                                                                    Type of license
                                                                                               Certified            Certified        Transitional
                                                                       Licensed                 general           residential            license                 All
Issuing states
and U.S. territories                                                            N                          N               N                    N          Number
                                                                                 a                                                               a
Wyoming                                                                                                   213             91                                    304
All                                                                      21,003                   32,684              34,885                   36            88,608
Source: GAO Analysis of Appraisal Subcommittee National Registry of Appraisers Database as of 10/31/02.
                                                                   a
                                                                   Not applicable.


                                                                   As previously noted, the database contains information on disciplinary
                                                                   actions taken and reported by state regulators (table 4). Of the 4,360
                                                                   disciplinary actions reported for active and inactive licensees in the
                                                                   database as of October 31, 2002, the category "other" accounted for the
                                                                   greatest number --1,088 (25 percent) followed by "fines" with 788 instances
                                                                   (18 percent). 2 The number of disciplinary actions taken by state appraiser
                                                                   regulatory agencies ranged from a single action to as many as 668.
                                                                   Specifically, Vermont reported taking a single action, while California,
                                                                   Oklahoma, and Virginia accounted for nearly 34 percent (1,473 actions) of
                                                                   the actions reported. Table 4 identifies the number and type of disciplinary
                                                                   actions taken against active licensees in each state.




                                                                   2
                                                                    According to an Appraisal Subcommittee official, “other” disciplinary actions can include
                                                                   warning letters, monetary penalties, probations, and educational requirements. In general,
                                                                   only the Appraisal Subcommittee and state regulatory agency have access to the details of
                                                                   disciplinary actions classified as other.




                                                                   Page 64                                       GAO-03-404 Real Estate Appraisal Industry Oversight
                                           Appendix IV
                                           National Registry Database of the Appraisal
                                           Subcommittee




Table 4: Disciplinary Actions, by State (Active and Inactive Licensees)

                                                      Type of disciplinary action
  Issuing states
        and U.S.                   Additional                        Down- Suspen- Revoca-         Voluntary    Official
      territories   Other Warnings education      Fine Probation     grade    sion    tion         surrender reprimand           All

                                                                                                                             No. of
                       N         N           N       N           N        N         N         N            N           N    actions
                                  a           a                  a                                                      a
Alabama               15                              2                   3         12        3            3                     38
                        a         a           a                           a                    a                        a
Alaska                                                1          2                  1                      1                      5
                                  a           a       a                                                                 a
Arizona              119                                        35        1         19       15           12                    201
                        a                                                 a                                a            a
Arkansas                         7            6       4         12                  3         5                                  37
                                                                                                                        a
California             5       108            3   105            6        2         87       83           45                    444
                        a                                                 a                                             a
Colorado                         2            3      29         18                  7         6            3                     68
                                  a                              a        a                                a
Connecticut            4                      4       5                             1         1                        1         16
                        a         a                   a                   a          a         a           a            a
Delaware                                      2                  2                                                                4
                        a                                                                                  a
Florida                          3            9      80         31        1         8        26                        1        159
                                              a                  a                                                      a
Georgia               87         3                   26                   1         34       56           23                    230
                        a                     a       a          a        a          a                     a            a
Hawaii                           1                                                            1                                   2
                        a                                                 a                    a                        a
Idaho                            4            8      13          9                  2                      2                     38
                                              a                                                                         a
Illinois               4       116                   21          8        2         12       36            7                    206
                        a         a           a       a                   a                                a
Indiana                                                          3                  4         1                        2         10
                                                                 a        a
Iowa                   2         1          62       10                             3         7            3           1         89
                                                                          a                                             a
Kansas                 1         9          24       25         12                  5         9            a                     85
                        a                                                 a                                             a
Kentucky                         2          11       59          1                  14        3            2                     92
                        a                     a                  a        a                    a           a            a
Louisiana                       14                    2                             4                                            20
                                  a                                       a          a
Maine                  2                      1      13          2                            1            1           3         23
                                  a                              a        a                                a            a
Maryland               1                      2       4                             8         2                                  17
                        a         a                   a                   a          a                                  a
Massachusetts                                 1                  8                            2            3                     14
                        a         a           a                           a                                             a
Michigan                                             17         16                  6         5            1                     45
                                  a           a                  a        a                                             a
Minnesota             13                             14                             28        4            a                     59
                                  a                   a                   a                                             a
Mississippi          132                    29                   4                  5         1           48                    219
                                              a       a                   a                                             a
Missouri               1         1                              27                  3         7            5                     44
                        a         a           a       a                   a          a         a                        a
Montana                                                          5                                         1                      6
                        a         a                   a                   a          a         a                        a
Nebraska                                      9                  4                                         7                     20
                        a         a                              a                                         a            a
Nevada                                      27       20                   8         6         8                                  69
New
                        a         a           a       a          a        a                                             a
Hampshire                                                                           2         1            1                      4




                                           Page 65                               GAO-03-404 Real Estate Appraisal Industry Oversight
                                                                   Appendix IV
                                                                   National Registry Database of the Appraisal
                                                                   Subcommittee




(Continued From Previous Page)
                                                                                 Type of disciplinary action
  Issuing states
        and U.S.                          Additional                                                   Down- Suspen- Revoca-       Voluntary    Official
      territories          Other Warnings education                         Fine Probation             grade    sion    tion       surrender reprimand           All

                                                                                                                                                             No. of
                                 N                 N                   N        N                 N         N       N         N            N           N    actions
                                   a                a                   a
New Jersey                                                                      6                 4          2      9         1            2           4         28
                                   a                                                               a         a       a                     a            a
New Mexico                                         4                   5        1                                             1                                  11
                                   a                a                   a        a                 a         a       a                                  a
New York                                                                                                                      2            1                      3
                                                    a                            a                 a         a
North Carolina                    1                                    45                                          38         3            5          43        135
                                   a                a                            a                 a                                                    a
North Dakota                                                           7                                     2      1         2            1                     13
                                   a                                             a                 a         a                             a            a
Ohio                                             26                    11                                          17         1                                  55
                                                    a                            a                 a         a                             a
Oklahoma                      371                                      2                                            1       293                        1        668
                                                                                                   a         a
Oregon                            1                5                   3     158                                   15         5            7           4        198
                                   a                a                                                        a
Pennsylvania                                                           49      40                 4                 5         3            3           3        107
                                   a                a                   a        a                 a         a                             a            a
Rhode Island                                                                                                        4         4                                   8
                                   a                a                   a                                                                  a            a
South Carolina                                                                 33                16          7      4         5                                  65
                                                    a                   a        a                 a         a                 a           a
South Dakota                      4                                                                                 3                                 11         18
                                                                                                                                                        a
Tennessee                       24               46                    69      13                 3          3      1         5            5                    169
                                                                                                             a                                          a
Texas                             1                3                   42      12                 5                 4         6            1                     74
                                                    a                                                                a                                  a
Utah                              4                                    7       28                 7          1                2           13                     62
                                   a                a                            a                 a         a       a         a           a            a
Vermont                                                                1                                                                                          1
                                                                        a                          a         a                             a            a
Virginia                      295                  6                           43                                   6        11                                 361
                                   a                                                                         a                                          a
Washington                                       34                    a        3                19                 9        15            3                     83
                                   a                a                   a        a                 a         a                 a           a            a
West Virginia                                                                                                       5                                             5
                                                    a                                              a         a       a
Wisconsin                         1                                    20       1                                             2            1           3         28
                                   a                a                   a        a                 a         a                 a                        a
Wyoming                                                                                                             2                      2                      4
All                         1,088              395                462        788               263          33    398       644          212          77      4,360
Source: GAO Analysis of Appraisal Subcommittee National Registry of Appraisers database as of 10/31/2002.
                                                                   a
                                                                   Not applicable.




                                                                   Page 66                                       GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix V

Evolution and Use of Automated Valuation
Models                                                                                                    Append
                                                                                                               x
                                                                                                               i
                                                                                                               V




                       Automated valuation model (AVM) is a broad term used to describe a range
                       of computerized econometric models that are designed to provide
                       estimates of residential real estate property values. AVMs may use
                       regression, adaptive estimation, neural networking, expert reasoning, and
                       artificial intelligence to estimate the market value of a residence. The
                       earliest users of computer-assisted property valuations appear to have been
                       government assessors who needed to value large volumes of property for
                       tax purposes. However, early efforts to develop computer-assisted
                       appraisal models were hampered by the lack of large data sets and the
                       costs of computing.

                       Since the early 1990s, AVMs have become commercially viable, for several
                       reasons. First, computerized real property data sets have become available
                       at the metropolitan and state levels. Second, the cost of computers has
                       declined. Third, the Internet has improved distribution capabilities and
                       further increased the availability of needed data. Finally, the growth of the
                       secondary mortgage market has helped fuel the demand for AVMs as a
                       faster and more economical alternative to traditional appraisals. According
                       to Standard & Poor’s, AVMs were expected to play a role in 10 percent of all
                       new loan originations in the residential mortgage market in 2002 and will
                       be put to a variety of uses, from acting as checking appraised values to
                       being the sole determinant of a property’s value.



Three Types of AVM     There are many different types of AVMs available. However, three types of
                       AVM models are most commonly used: hedonic, repeat sales, and hybrids.
Models Are Currently
Used                   • Hedonic models use a sales comparison (or market) approach, which
                         is the most commonly used approach for appraising single-family
                         houses. Estimates are based in part on recent sales of comparable
                         homes in the local market. These models require information about
                         specific characteristics, including the living area and lot sizes, age of the
                         property, and other physical attributes, to determine value. Recent
                         market sales of comparable homes in the local market are used to
                         estimate the price of the subject property. In effect, hedonic models use
                         a sales comparison (or market) approach, which is the most common
                         used approach for most appraisals of single-family houses for lending
                         purposes.

                       • Repeat sales models calculate and apply geographic-specific indexes
                         to update a property’s last known sales price. Price trends are
                         constructed at the zip code and county levels using matched-pair



                       Page 67                          GAO-03-404 Real Estate Appraisal Industry Oversight
                        Appendix V
                        Evolution and Use of Automated Valuation
                        Models




                           analysis. Indexes are generally developed with several price tiers within
                           each zip code and assume that the subject property behaves much like
                           other properties in the zip code and price tier. Unlike the hedonic model,
                           the repeat sales model does not require information on property
                           characteristic, only the prices and sale dates for properties within a
                           specific geographic area.

                        • Hybrid models are typically a combination of hedonic and repeat sales
                          models, although all hybrids do not give the same weight given to each.
                          Another form of hybrid models combines an AVM with involvement or
                          input from the appraiser. For example, an appraiser may use the results
                          of an AVM as a tool to develop a standard appraisal.



Data Sources for AVMs   Regardless of the model used, the quality of the underlying data determines
                        the AVM’s accuracy and usefulness. The data that are the core of any
Vary in Completeness    model’s results must be accurate, current, and complete. Data sources for
and Reliability         AVMs include public records, multiple listing services, and traditional real
                        estate records. Sources of public data include tax records and information
                        kept by country recorders, but both these sources have limitations. Tax
                        assessment data are often part of the database mix, but AVMs do not rely
                        solely on the assessed value of a home. For example, Freddie Mac uses tax
                        assessments along with other factors to determine property values in its
                        models. It has found that the tax assessment alone is not sufficient to
                        provide accurate value estimation. Information at the county level is not
                        available for properties that are located in “nondisclosure states.”1 Further,
                        counties use different methods of collecting data, so that the information
                        available in some counties is more complete and consistent than it is in
                        others.

                        Multiple listing service data are considered by some to be the best available
                        for determining trends in specific geographic markets and changes in the
                        overall market. But this data can also be as fragmented and
                        nonstandardized as county data. According to one of the AVM developer
                        and vendor that we contacted, his company is increasingly relying on data
                        from appraisers because they are usually more accurate and in-depth than
                        publicly available data. In addition, he stated that some AVM developers


                        1
                         Nondisclosure states are those states in which the price and terms of real estate
                        transactions, such as the amount paid for the property, are not subject to public disclosure.




                        Page 68                                GAO-03-404 Real Estate Appraisal Industry Oversight
                 Appendix V
                 Evolution and Use of Automated Valuation
                 Models




                 and vendors might be physically collecting their own data, especially in
                 areas where public data are sparse.

                 Because of the problems obtaining reliable data and the fact that properties
                 are not physically inspected, AVMs are generally not considered a viable
                 replacement for traditional appraisals. AVMs work best in markets that
                 have an abundance of recent sales data and homogenous neighborhoods.
                 In rural areas, they may be less useful, either because of a shortage of
                 comparable sales or because rural properties are often unique. Without a
                 physical appraisal, AVMs may not take into account excess depreciation,
                 wear and tear, and upgrades that are not contained in the public records. In
                 addition, the proprietary nature of commercial AVMs has raised concerns
                 about the “black box” technology these models use. AVM vendors are not
                 required to make their AVM methodologies available to the public. As a
                 result, some groups have raised concerns that AVM models may be
                 including factors that could unintentionally introduce bias into their
                 analysis.



AVMs Have Both   AVMs offer a number of advantages over traditional appraisals. First, AVMs
                 are generally much faster and cheaper to use in estimating the value of a
Advantages and   property. For example, traditional appraisals for single-family residences
Disadvantages    typically cost several hundred dollars and can take days or even weeks,
                 depending on market conditions and the availability of the appraiser. AVMs,
                 however, cost less than $100 and take just a few minutes. Second,
                 proponents of AVMs argue that this technology delivers more objective and
                 consistent appraisal values than human appraisers, who often value
                 properties differently and may be subject to pressure from lenders to
                 assess a property at a specific value. Third, AVMs can be used to validate
                 traditional appraisals, especially in valuing high-risk loans.

                 As has been pointed out, AVMs also have a number of disadvantages.
                 Because data may not be available or may not be complete and reliable, the
                 models are sometimes unworkable. The lack of a physical inspection could
                 mean that some important factors are not taken into account. And AVM
                 technology is proprietary, so that vendors do not have to disclose their
                 methodologies to the public. Despite these disadvantages, AVMs provide a
                 fast, inexpensive means of valuing properties in active markets.




                 Page 69                             GAO-03-404 Real Estate Appraisal Industry Oversight
                       Appendix V
                       Evolution and Use of Automated Valuation
                       Models




Guidance and           As of January 2003, federal financial institutions regulators have not issued
                       specific regulations or policies governing a federally insured depository
Regulations on Using   institution’s use of AVMs. According to representatives of the federal
AVMs Are Relatively    financial institutions regulators, federally insured depository institutions
                       are free to use AVMs for transactions not considered to be federally related
New                    transactions, such as mortgage loans falling below the $250,000 threshold
                       for appraisals. The regulators stated that their examiners are being
                       introduced to AVMs through various training programs.

                       The Appraisal Standards Board has issued an advisory opinion, stating that
                       the output of an AVM by itself does not constitute an appraisal.2 However,
                       the advisory opinion states that appraisers can use AVMs as a tool in
                       developing an appraisal, appraisal review, or appraisal consulting opinions
                       and conclusions. The opinion lists five critical questions that an appraiser
                       must answer before deciding to use an AVM:

                       • Does the appraiser have a basic understanding of how the AVM works?

                       • Can the appraiser use the AVM properly?

                       • Are the AVM and the date it is used appropriate?

                       • Is the AVM output credible?

                       • Is the AVM output sufficiently reliable for use in the assignment?

                       The advisory opinion also identifies the steps appraisers should take to
                       ensure that the output of an AVM is communicated in a way that is not
                       misleading.

                       Fannie Mae and Freddie Mac, the two government-sponsored enterprises
                       (GSE) that control a significant portion of the secondary market for
                       conventional single-family mortgage loans, include AVMs within their
                       automated loan underwriting systems. According to representatives of the
                       two GSEs, their automated loan underwriting systems use various factors
                       to determine the appraiser-related services that need to be performed. In
                       some cases, the two GSEs allow lenders to use an AVM rather than


                       2
                        Appraisal Standards Board, Use of Automated Valuation Model (Advisory Opinion 18)(July
                       9, 1997).




                       Page 70                             GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix V
Evolution and Use of Automated Valuation
Models




requiring an appraisal because the automated loan underwriting system has
sufficient information. Both Fannie Mae and Freddie Mac reportedly use
their proprietary AVMs as part of their quality control systems and their
own risk and portfolio management. Freddie Mac has also made its
proprietary stand-alone AVM available to other public and private entities.




Page 71                             GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VI

The Appraiser Qualifications Board’s Process
and Fees for Approving Appraiser Education
Courses and Certifying Instructors                                                                        Appendx
                                                                                                                iVI




                        Some providers of education courses for appraisers have expressed
                        concerns about the fees the Appraiser Qualifications Board (AQB) charges
                        to approve courses and certify instructors. This appendix contains
                        information on (1) the AQB’s course approval program, (2) the AQB’s
                        instructor certification program, (3) options the AQB has offered education
                        providers for approving distance education courses, and (4) fees charged
                        by other entities offering similar course approval and instructor
                        certification programs.



AQB’s Course Approval   According to the AQB, it established its course approval program at the
                        request of state regulators and education providers associated with the real
Program                 estate appraisal industry. AQB officials told us that many state regulators
                        had notified the AQB that Uniform Standards of Professional Appraisal
                        Practice (USPAP) courses were deficient and that appraisers were facing
                        disciplinary action as a result of not fully understanding the standards.
                        Participation in the course approval program is entirely voluntary for
                        course providers, and the AQB encourages but does not require states to
                        accept approved courses for appraiser education requirements. Moreover,
                        a state may set its own requirements, which all education providers
                        operating in the state—even those offering AQB-approved courses—must
                        meet.

                        Education providers that choose to participate in the AQB’s course
                        approval program must submit course materials and policies for review by
                        a member of the AQB Review Panel. Appraisal Foundation officials told us
                        that AQB review panelists are college professors from Virginia
                        Commonwealth University, the University of Hawaii, and Texas A&M
                        University with experience in real estate appraising. According to the AQB,
                        the chief reviewer also performs a summary review to assure objectivity
                        and quality control. The chief reviewer then recommends whether the AQB
                        should approve the course. According to Appraisal Foundation officials,
                        education providers may be asked to fix identified deficiencies prior to
                        receiving approval for the course. Approval is valid for 3 years, except for
                        courses involving the USPAP, which must be approved annually.

                        The AQB offers education providers content review services for all
                        courses—qualifying courses for trainees as well as continuing education
                        courses for practicing appraisers—including distance education courses.
                        Courses that are approved for qualifying education will automatically be
                        approved for continuing education. Distance education providers must
                        have their delivery methods certified by the International Distance



                        Page 72                         GAO-03-404 Real Estate Appraisal Industry Oversight
                           Appendix VI
                           The Appraiser Qualifications Board’s Process
                           and Fees for Approving Appraiser Education
                           Courses and Certifying Instructors




                           Education Certification Center (IDECC). AQB officials noted that IDECC
                           certification is essential, since distance education courses are held to a
                           different standard than traditional classroom setting courses because
                           students do not have direct in-person interaction with instructors.

                           The AQB’s fees for approving courses vary based on the length and type of
                           course. For example, the initial fee for approving a 15 to 29 hour qualifying
                           education course is $1,200, while the fee for a course of 30 or more hours is
                           $1,400. The renewal fee is $125. For continuing education courses, AQB
                           charges $800 to approve a 2 to 8 hour course, $900 to approve a 9 to 16 hour
                           course, and $1,000 to approve a course of more than 16 hours. The renewal
                           fee for these courses is $100. AQB charges distance education providers
                           the same fees, but distance education providers must also pay service fees
                           to IDECC. IDECC charges $750 to review the first course and $400 to
                           review each additional course. Distance education courses with IDECC
                           certification are approved for 3 years, with a recertification fee of $270.



AQB’s USPAP                AQB’s USPAP instructor certification program was implemented in
                           February 2002 as part of the revisions to the Real Property Appraiser
Instructor Certification   Qualification Criteria. According to the AQB, the instructor certification
Program                    program, like the approval process for USPAP courses, was adopted in an
                           effort to improve the overall quality of USPAP training. Although
                           participation in the program is voluntary, as of January 1, 2003, only AQB-
                           certified USPAP instructors were permitted to teach the national USPAP
                           courses.1 The AQB certifies instructors at the national level, but some
                           states have their own requirements that instructors must also meet.

                           The prerequisites for AQB’s USPAP instructor certification program
                           include at least 7 years of appraisal experience in any discipline and at least
                           35 classroom hours of appraisal teaching experience within the last 5 years.
                           Individuals who complete the USPAP instructor certification courses and
                           pass the examination must take a USPAP update course and examination
                           every 2 years in order to remain certified.

                           Appraisal Foundation officials reported that past and present Appraisal
                           Standards Board members develop, maintain, and teach the USPAP


                           1
                            The AQB’s minimum qualification criteria for those seeking to become appraisers require
                           the course or its equivalent. AQB has also established a continuing education requirement
                           for appraisers of 7 hours of similar training every 2 years.




                           Page 73                               GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VI
The Appraiser Qualifications Board’s Process
and Fees for Approving Appraiser Education
Courses and Certifying Instructors




instructor certification program course with guidance from the AQB and
the Education Council of Appraisal Foundation Sponsors (ECAFS).2 For
example, an Appraisal Foundation official told us that members of the ASB
had developed the course content and that the AQB had contracted with a
psychometrician experienced in the science of examinations to develop the
examination structure. The AQB also contracts with a firm specializing in
psychometrics—Gainesville Independent Testing Services, LLC—to review
the examinations after every course. Gainesville scores each student’s
exam and summarizes its strengths and weaknesses. Students who fail the
course receive both their results and a summary of their strengths and
weaknesses for each component of the examination.

The AQB instructor certification program includes a 2 1/2 day course,
followed by a half-day 120 multiple-choice question examination. The
course and exam cost $425. Individuals who participate in the program
and fail the examination may exercise one of the following options within
12 months:

• retake the 2 1/2 day instructor certification course and examination for
  $225, or

• retake the examination only for $95.

If an individual retaking the examination only fails to pass it the second
time and still desires to become certified, he or she must retake both the
course and the examination for $225.

Some education providers are concerned that AQB’s mandatory USPAP
instructor certification program is intended simply to generate revenue for
the Appraisal Foundation. According to the Appraisal Foundation, the
program yielded approximately $165,000 in revenues for calendar year
2002, while expenses for the program were almost $230,000, resulting in a
deficit of $63,000. The AQB Instructor Certification Program is unique to
the AQB, and the AQB has not approved any alternative methods of
certification for individuals who teach the National USPAP courses at the
national level.




2
 ECAFS is an advisory committee to the Appraisal Foundation made up of representatives
from the Appraisal Foundation sponsoring organizations.




Page 74                               GAO-03-404 Real Estate Appraisal Industry Oversight
                           Appendix VI
                           The Appraiser Qualifications Board’s Process
                           and Fees for Approving Appraiser Education
                           Courses and Certifying Instructors




Options Provided by        State regulatory agencies also offer course approval programs for
                           education providers offering training for appraisers. In some states, this
AQB for Approving          approval is mandatory even if the state participates in AQB’s approval
Distance Education         program. For distance education, the AQB offers four options, including:
Courses                    • having an accredited college or university present the course, in which
                             case the AQB would approve both the content and delivery method;

                           • submitting the course to the American Council on Education (ACE)
                             College Credit Recommendation Service for content and delivery
                             method approval;

                           • submitting the course to IDECC to have the delivery method approved
                             and then submitting the course to the AQB to have the content
                             approved; and

                           • submitting the course to IDECC to have the delivery method approved
                             and then submitting the course to the state regulatory agency for
                             appraisers (in the state where the course will be offered) for additional
                             approval.



Relative Costs of AQB      To compare the AQB’s fees with those of other entities offering similar
                           services, we obtained information from the ACE College Credit Approval
Course Approval and        Service, the Accrediting Council for Continuing Education and Training,
Instructor Certification   the National Association for Practical Nurse Education and Service Inc.,
                           the Distance Education and Training Council, and the International
Programs                   Distance Education Certification Center. The course approval programs
                           these entities offer vary in scope but in general provide services similar to
                           those of the AQB. For example, the National Association for Practical
                           Nurse Education and Service offers an approval program for continuing
                           and vocational education courses. The Accrediting Council for Continuing
                           Education provides both course approval services for continuing education
                           and accreditation services for entire institutions.

                           Directly comparing the fees charged by these organizations is difficult
                           because they do not all offer exactly the same services; moreover, in some
                           cases the fees are not the only cost to the education provider. Fees for
                           services from the National Association for Practical Nurse Education and
                           Service can range from $60 for a one-time course offering by an association
                           member to $600 for more than 60 repeat course offerings by a nonmember.



                           Page 75                               GAO-03-404 Real Estate Appraisal Industry Oversight
                                                                    Appendix VI
                                                                    The Appraiser Qualifications Board’s Process
                                                                    and Fees for Approving Appraiser Education
                                                                    Courses and Certifying Instructors




                                                                    Fees for accreditation services by the Accrediting Council for Continuing
                                                                    Education and Training are a minimum of $6,300, which includes a
                                                                    preapplication evaluation, an application for initial accreditation, a
                                                                    mandatory accreditation workshop for education provider representatives,
                                                                    and a site visit. Table 5 provides an overview of the fees charged for course
                                                                    approval services.



Table 5: Approval Service Fees, by Service Provider as of February 2003

                                                                                                             Service provider
                                                                                                   a
Type of approval service                                                      AQB             ACE              ACCETb               NAPES                 DETCc      IDECC
Qualifying education course                                    $1,200-$1,400                  $700                   n/a                 n/a                n/a           n/a
Continuing education course                                        $800-$1,000                  n/a              $6,300           $60-$600                  n/a           n/a
Distance education course content                                  $800-$1,000                $700               $6,300                  n/a               $300           n/a
Distance education delivery method                                              n/a           $700               $6,300                  n/a               $300   $225-$750
                                                               .
Source: GAO analysis of data obtained from the service providers

                                                                    n/a = not available or applicable.
                                                                    Note: ACCET= Accrediting Council for Continuing Education and Training; NAPES= National
                                                                    Association for Practical Nurse Education and Service Inc.; DETC = Distance Education and Training
                                                                    Council; IDECC = International Distance Education Certification Center.
                                                                    a
                                                                     Fees do not include variable costs, which the education provider pays (for example, on-site review,
                                                                    data entry, and staff travel, hotel, and per diem).
                                                                    b
                                                                        Fees for the accreditation of an institution and the current courses it offers.
                                                                    c
                                                                     Application fee for accreditation of a distance education institution. Other fees may apply for services
                                                                    such as on-site visits, subject specialist review, and annual fees.


                                                                    No other entity offers a program similar to AQB’s USPAP instructor
                                                                    certification program, although the Appraisal Institute—an international
                                                                    membership association of professional real estate appraisers—has a
                                                                    program with similar examination requirements. Among a number of other
                                                                    requirements, individuals seeking to be certified to teach Appraisal
                                                                    Institute courses must successfully complete its Instructor Leadership
                                                                    and Development Conference and subsequent examination requirements.
                                                                    The fee for taking the Appraisal Institute’s last Instructor Leadership and
                                                                    Development Conference—held in February to March 2002—was $350. In
                                                                    contrast, the AQB charges $425 for USPAP instructor certification.




                                                                    Page 76                                         GAO-03-404 Real Estate Appraisal Industry Oversight
                        Appendix VI
                        The Appraiser Qualifications Board’s Process
                        and Fees for Approving Appraiser Education
                        Courses and Certifying Instructors




State Fees for Course   In addition to the fees charged by the AQB for its course and instructor
                        approval programs, education providers in certain states may also have to
and Instructor          pay fees to state appraiser regulatory agencies for course approval and
Approval                instructor certification. Information obtained from the Internet sites of 47
                        of the 55 state regulatory agencies and, in some cases, directly from the
                        state regulatory agency indicated that fees ranged significantly between
                        individual states. For example, fees charged by individual states ranged
                        from:

                        • zero to $500 for course approval of qualifying education courses,

                        • zero to $250 for course approval of continuing education courses,

                        • zero to $500 for approval of distance education courses, and

                        • zero to $300 for instructor certification.3

                        Eight of the states did not charge a fee for course approval and instructor
                        certification.




                        3
                         One state charged a single certification fee of $1,000 to education providers for all
                        instructors.




                        Page 77                                 GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII

Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion                                       Append
                                                                                  x
                                                                                  iVI




               Page 78     GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 79                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 80                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 81                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 82                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 83                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 84                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 85                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VII
Federal Financial Institutions Examination
Council’s Legal Advisory Group Opinion




Page 86                              GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VIII

Comments from the Appraisal Subcommittee                                    Appendx
                                                                                  iI
                                                                                  V




                Page 87   GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VIII
Comments from the Appraisal Subcommittee




Page 88                           GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VIII
Comments from the Appraisal Subcommittee




Page 89                           GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix VIII
Comments from the Appraisal Subcommittee




Page 90                           GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix IX

Comments from the Appraisal Foundation                                     Appendx
                                                                                 IiX




              Page 91    GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix IX
Comments from the Appraisal Foundation




Page 92                            GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix X

Comments from Fannie Mae                                                     Append
                                                                                  x
                                                                                  i
                                                                                  X




             Page 93       GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix X
Comments from Fannie Mae




Page 94                    GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix X
Comments from Fannie Mae




Page 95                    GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix X
Comments from Fannie Mae




Page 96                    GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix XI

Comments from Freddie Mac                                                 Appendx
                                                                                iI
                                                                                X




              Page 97   GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix XI
Comments from Freddie Mac




Page 98                     GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix XII

Comments from Department of Housing and
Urban Development                                                          Append
                                                                                x
                                                                                iI
                                                                                X




               Page 99   GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix XII
Comments from Department of Housing and
Urban Development




Page 100                          GAO-03-404 Real Estate Appraisal Industry Oversight
Appendix XIII

GAO Contacts and Acknowledgments                                                                  Append
                                                                                                       x
                                                                                                       iI
                                                                                                       X




GAO Contacts      David Wood (202) 512-8678
                  Harry Medina (415) 904-2000



Acknowledgments   In addition to those named above, Susan Baker, Emily Chalmers, Erika
                  Cruz, Edda Emmanuelli-Perez, Joel Grossman, Tracy Guerrero, Jennifer
                  Lai, Alexandra Martin-Arseneau, Marc Molino, David Noguera, Jerome
                  Sandau, and Paul Thompson made key contributions to this report.




(250079)          Page 101                      GAO-03-404 Real Estate Appraisal Industry Oversight
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