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 Some have concluded that the law is obsolete institutions’ use of appraisals, and a federal agency, the Appraisal because the problems Title XI was Subcommittee, monitors and coordinates the functions of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 email@example.com. 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 This is a work of the U.S. Government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. It may contain copyrighted graphics, images or other materials. Permission from the copyright holder may be necessary should you wish to reproduce copyrighted materials separately from GAO’s product. 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.  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. 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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)