The opinions expressed in this article are the authors only and do not necessarily reflect the opinions of other state board members or the Florida Real Estate Appraisal Board (FREAB).
The decision of whether or not to regulate Appraisal Management Companies (AMC’s) is one currently facing state legislatures across the country. The plain language of Dodd-Frank initiated a regulatory construct that would be implemented by the states. Dodd-Frank assigned rule-making authority for the implementation and parameters of the regulatory system to the Interagency Institutions. Earlier this summer, those rules were finally published. Each state regulator I’ve spoken with across the country understood Dodd-Frank in the same manner I did. This understanding was that each state would be required to establish a licensing and enforcement program for AMC’s and there would be no real choice on whether or not a state could participate. Once the final interagency rules were published this summer, it became clear that the choices for each state are more nuanced. In my opinion, at this point, a state would be better served to not participate in the AMC regulatory construct.
The Final Rule (seen here) clarifies that states may choose to participate, or not, in the state-level regulation of AMC’s. Further, there is no penalty to a state that chooses to not have a regulatory structure. However, if a state does not have an AMC regulatory program, AMC’s are barred from providing appraisal management services for Federally Related Transactions (FRT’s) in that state. Again, this is, in my opinion, a clear departure from the plain language of Dodd-Frank and state regulators’ understanding of what would be the federal requirements surrounding it. While the federal government was likely just trying to avoid creating an unfunded mandate, the implications are, nonetheless, still clear. Essentially, the federal government has ‘punted’ and told states that it’s our job to figure out how to regulate them, or else AMC’s can’t participate in FRT work.
According to some estimates, 60% of FRT work currently filters through an AMC. If a state decides to not create a regulatory structure, lenders would have three avenues for completing these appraisals:
- Engage appraisers directly (through an internal department separate from loan origination);
- Employ an AMC under the panel threshold (the AMC can’t oversee more than 15 appraisers in a state or 25 in two or more states);
- Utilize an AMC that is wholly owned and operated by a lending institution already overseen under federal law.
To be clear, if the 60% AMC involvement estimate is accurate, that means 40% of the work is already completed by engaging appraisers directly.
Opponents of my position argue that this would be dangerous for consumers and appraisers, or worse, that this is simply an attempt to enact a policy that would eliminate AMC’s from mortgage lending appraisal work. To the contrary, I believe that consumers are best protected by enforceable regulation and should not be misled that effective regulation is happening when, in my opinion, it is not. I also believe that appraisers should be aware that the protections they seek regarding appraiser independence and customary and reasonable fees already exist in federal law. Finally, the elimination of AMC’s from FRT work is a debatable consequence, but ultimately is not one that is imposed by state law. That’s an imposition borne of federal law.
Again, states do not have to participate in this construct, but if they do, they’re responsible for ensuring that their enforcement program meets the minimum requirements of the AMC Final Rule. These requirements, among other things, require states to ensure that AMC’s conduct their practices in accordance with section 129E(a)-(i) of the Truth in Lending Act (TILA). This section of TILA addresses ensuring appraiser independence and the payment of customary and reasonable fees by creditors and their agents. Again, these requirements are in place at the federal level regardless of whether or not a state chooses to have a licensing and enforcement program. Also, the Appraisal Subcommittee (ASC) Hotline (https://www.asc.gov/Hotline.aspx) is and will remain available to appraisers who feel their appraisal independence is being jeopardized by a lender or AMC, regardless of the existence of a state regulatory program. There is tremendous third-party oversight already existing at the federal level for AMC’s by extension of their vendor/agency relationship with lenders.
In Florida, House Bill 303 was signed into law in June of 2010 and became effective on July 1, 2011. This law required the registration of AMC’s and created a new licensing category for them. The FREAB entered into rule-making and developed Rule 61J1-9.002 (seen here) in 2013. If you visit the rule, you’ll see the basic measures Florida has taken attempting to regulate AMC’s. As of August of 2015, AMC complaints at the state level in Florida have been almost non-existent, and not a single complaint has reached the board level. Either the regulation is unnecessary, or it’s ineffective.
To be clear, I am aware of other states taking action against an AMC at the state level. I believe that part of the reason for the lack of complaints is a complete lack of clarity on the role an AMC plays. I’ve still not heard a clear distinction of whether or not AMC’s are a client extension or purely serving in an agency role. Is that not a core-level question to answer prior to attempting to regulate? The federal rules seem to suggest an agency role, however, the bankruptcy case of Evaluation Solutions/ES Appraisal Services describes the AMC in a client role. With this basic level of ambiguity, how can states enforce an effective regulatory program?
Mentioned above is Florida Rule 61J1-9.002. This, again, is the rule addressing standards of professional practice for AMC’s. Florida Rule 61J1-9.001 is the rule addressing standards of practice for appraisers in Florida. I’ll save you any time in looking up the latter. It effectively says, see USPAP. Why is that? Because there are recognized standards of practice within the appraisal industry, established by industry participants, and updated from time to time. There are no recognized standards of practice for AMC’s. USPAP does not apply to AMC’s. There’s federal law that extends to AMC’s as third-party vendors of lenders, but not standards of practice. When an industry seeks legitimacy and moves from a trade to a profession, they create standards of practice by which they can be effectively understood, managed, and if necessary, regulated. After all, that was the evolutionary course of the appraisal industry. It would seem to me that commonly accepted standards of practice should be a precursor to any effective regulatory structure.
The federal definition of an AMC and Appraisal Management Services are provided within the Final Rule (see Final Rule link above). The description of Appraisal Management Services refers to recruiting, selecting, retaining, and contracting appraisers. Further, the definition describes services as “Managing the process of having an appraisal performed, including providing administrative services such as receiving appraisal orders and appraisal reports, submitting appraisal orders and appraisal reports, submitting completed appraisal reports to creditors and secondary market participants, collecting fees from creditors and secondary market participants for services provided, and paying appraisers for services performed.” Does this sound like a regulated profession? Do these sound like state level regulated activities? The definition continues that appraisal management services may include “Reviewing and verifying the work of appraisers.” If this final ‘review’ activity is a technical review as opposed to a compliance review, that work is already regulated under Standard 3 of USPAP and would require that a licensed appraiser complete that task. So in essence, the only activity not already regulated at the state level are the nebulous activities above that include contracting appraisers, managing processes, and performing administrative tasks. What’s fascinating in this discussion is that my opinion on this is the same position AMC’s shared when rule-making was undertaken in Florida two years ago. But now that the federal rules place a regulatory compulsion on the states in order for AMC’s to participate in FRT’s, AMC’s are advocating for state regulation.
I’ve come to this position not out of some disdain for AMC’s or in an attempt to eliminate them from FRT work. In my private practice, I have several AMC clients (or agents…) and have a good working relationship with them. In fact, as previously stated, the actual implication of an AMC being barred from FRT work is as clear as mud. The ASC is seeking interagency clarification on the FRT definition, and it’s quite possible that very few transactions actually meet the definition of an FRT.
My position is also time-specific. If there were greater clarity on some of these basic questions or standards of practice, perhaps a regulatory construct would be appropriate. And states are not precluded from launching AMC regulatory programs at any point moving forward, including after the 36 month implementation period following the Final Rule. However, states that do have a licensing program will begin to have their program included in their compliance review process immediately after the establishment of the AMC national registry. Should the national registry be established in 2016 (though the actual date and corresponding fees are still unknown), states with existing programs that are in the review cycle prior to 2018, will not have a full 36 months to implement their program before the ASC reviews them. To their credit, the ASC has suggested that states in this category (of which there are many) will not have their AMC programs truly reviewed in a consequential way until after the 36 month implementation period.
More regulation does not equal better or even effective regulation. That’s a false choice and an easy trap. Federal regulations exist and will continue to exist regardless of the decisions of individual states. What concerns me more as a state would be making a reflexive decision to regulate a business simply to ensure that business’ participation in statewide activities. That’s backwards and sounds more like cronyism than a principled approach to state regulation. The issuance of a state credential, license number, and collection of a fee is not effective regulation and sends a false message of security to consumers. And while this is a decision that will ultimately reside with state legislatures, regulators and interested industry participants should serve as subject matter experts on this complicated issue and make their opinions known to lawmakers.
I see this as a matter of principle. The decision to introduce regulation into private industry is not one to be made lightly. And that decision should not be made by trying to maintain the status quo or back-into a regulatory structure for the purposes of propping up a single trade or profession. The Appraisal Management Services definition above does not meet the high hurdle I believe a state should have for identifying professional practices and choosing to regulate them. Period. It’s as simple as that. Legislators, do you really think additional Dodd-Frank-induced regulation is the answer? States should not allow themselves to be ‘strong-armed’ into choosing to regulate this practice simply because the alternative is that AMC’s would not be able to participate in FRT work. The states didn’t create that problem for AMC’s. The federal law does. To borrow the old quip, ‘Lack of planning on your part does not constitute an emergency on my part’. States, don’t be leveraged into regulating something that you otherwise would not choose to regulate.
On August 7th, 2015, I chaired an AMC regulatory workshop commissioned by the FREAB. The workshop brought together industry stakeholders from all over the country to discuss each side of the issue. There was an exhaustive several hour exchange regarding the role of AMC’s and AMC regulation. The following Tuesday, August 11th, FREAB held another day-long workshop addressing this issue and digesting the information from the August 7th meeting. Ultimately, of the 8 board members present, 5 were in favor of opting out of a state level regulatory program, and 3 were in favor of opting in.
We now have the benefit of hindsight and the full and final rules outlining the AMC business and the parameters for a regulatory construct. That knowledge was not available prior to the June 2015 issuance of the Final Rule and was certainly not available when states where initially setting up their AMC regulatory programs. As a regulator of one of the 38 states that in good faith launched an AMC regulatory program prior to having the ‘full picture’, I would simply ask this question to regulators and legislators in those states: Knowing what you now know, if there were no state level regulatory program in place for AMC’s, would you go out and create one? I believe that the answer, right now at least, is ‘No’. And if the answer is ‘No’, then why would you choose to keep it? For the remaining states who are considering creating a regulatory program, make sure to read the fine print.
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