Regulating Real Estate Appraisers

First Came FIRREA, then Dodd-Frank. What’s the Next Wave in Oversight for Real Estate Appraisers?

This article was first published in the March edition of the MReport here. For more digital magazines from the MReport visit

The degree of oversight and regulation affecting the appraisal industry today got its roots as a result of the Savings and Loan (S&L) crisis of the 1980s.

As a result of that crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), creating for the first time a federal oversight system regulating valuations conducted for federally related mortgage lending transactions within Title XI of the Act. These new rules continued to morph into the regulations we are doing business under today, such as The Dodd– Frank Wall Street Reform and Consumer Protection Act, and the regulatory environment will continue to be a hot topic for appraisers in 2015 and beyond.

Unchartered Course: The Appraisal Industry Prior 1989
Prior to the passage of FIRREA (which at the time was referred to as Federal Interference Regarding Real Estate Appraisals) the appraisal community was a self-regulated industry where membership in national appraisal organizations and their respective designations represented an appraiser’s level of experience and expertise. The system of accountability resided in the by-laws of the various appraisal organizations governing the ethical and competent activities of the designated members and those pursuing designations enabling the organizations to self- discipline and mentor through a peer review process, those involved with the organizations, including revoking if necessary those with the designations

Unfortunately approximately only 30 percent of practicing appraisers in 1989 belonged to a national appraisal organization. The other 70 percent had no affiliation with a professional appraisal organization and as such were accountable to no one other than their clients, and the only consequence for unethical or incompetent behavior was possibly the loss of business.

The paradigm shift spurred by the S&L crisis relates to the creation of The Appraisal Foundation, the Uniform Standards of Professional Appraisal Practice (USPAP), the Appraisal Subcommittee (ASC) that oversees the activities of The Appraisal Foundation, and the state appraiser regulatory agencies in the postFIRREA world of valuations for federally related transactions.

These entities were created in response to appraisers being blamed in large part for the savings and loan failures in the 1980s.

Title XI of FIRREA required the establishment of the state appraiser regulatory agencies to oversee the licensing and certification of appraisers in all 55 states and jurisdictions.

The Appraisal Foundation Appraiser Qualifications Board became the entity establishing the minimum education and experience requirements for appraisers to qualify for state appraiser licensure or certification. The Appraisal Foundation Appraisal Standards Board became the entity establishing and administering the minimum standards of competency and ethical behavior appraisers must adhere to in order to retain their state licensure and certification.

In the 1990s and early 2000s that all seemed to be working. Appraisers were getting licensed and certified in the various states and the state appraiser regulatory agencies were taking action against the licensed and certified appraisers who were violating USPAP or otherwise egregious behaviors putting the public at risk.

And then along came the mortgage market meltdown of 2008.

A New Era Begins: Introduction of DoddFrank
In response to the meltdown of 2008, in 2010, the U.S. Congress passed a new set of regulations known as the DoddFrank Wall Street Reform and Consumer Protection Act.

Signed into law by President Obama in July 2010, it has been referred to as the most comprehensive financial regulatory reform measures taken since the Great Depression. The enrolled bill is more than 2,200 pages in length and has a word count of 383,013. It comprises sixteen titles, requires 243 new rules, created 12 new regulatory agencies, and will take more than five years to implement at a cost in excess of $30 billion.

As comprehensive as it is, the Dodd-Frank Act introduced minimal changes in the oversight of real property valuations.

Real property valuation oversight is contained in Title XIV, the Mortgage Reform and AntiPredatory Lending Act, which among others, created a new bureau called The Consumer Financial Protection Bureau (CFPB) tasked with the administration of the new laws and regulations.

Subtitle F–Appraisal Activities contains revisions to TILA (Truth in Lending Act) relating to Higher Risk Mortgages requiring creditors to obtain an on-site, full interior appraisal by a certified or licensed appraiser and established requirements for a second appraisal for rapid-resale transactions.

TILA amendments also expanded appraiser independence guidelines and payment of Reasonable and Customary Fees paid to appraisers.

Although the Federal Reserve Board published the Interim Final Rules relating to Reasonable and Customary Fees in October 2010, the fee issue remains one of the most widely discussed and debated issues within the valuation community.

Other regulatory changes in the Act and in the subsequent Final Rules published by the Agencies worth mention include conflict of interest and appraiser independence.

In response to the proliferation of appraisal management companies following implementation of the Home Valuation Code of Conduct and concerns expressed by industry participants, Congress also included AMCs regulations, specific prohibition language relating to appraiser independence, and the prohibition to have either a direct or indirect interest, financial or otherwise, in the property or transaction involving the appraisal.

Another significant TILA amendment was the mandatory reporting requirement for any mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, or any other person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principle dwelling of a consumer who has a reasonable basis to believe an appraiser is failing to comply with USPAP, is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct. If such unprofessional conduct is observed by any of those named, they are required to refer the matter to the applicable state appraiser certifying and licensing agency

FIRREA Title XI was also amended in the Dodd-Frank Act, the most significant changes since enactment in 1989, which included modification to 13 of the original 25 sections and the addition of three new sections.

One of the new sections (1124), established minimum requirements for states to establish registration requirements for appraisal management companies. Per Section 1124, the states are required to implement laws requiring AMCs to:

  • Register with and be subject to 28 | The M Report Feature supervision by state appraiser regulatory agencies;
  • Verify that only licensed and certified appraisers are used for federally related transactions;
  • Require that appraisals comply with USPAP; and
  • Require that appraisals are conducted independently and otherwise adhere to the TILA appraisal independence standards.

Section 1124 of FIRREA went into effect on January 21, 2013.

To date 38 states have enacted some type of AMC registration legislation

Another game changer is found in Section 1126 containing a general prohibition relating to the use of BPOs as the primary basis to determine the value of property to be secured for mortgage origination in conjunction with the purchase of a consumer’s principle dwelling.

The Interagency Appraisal and Evaluation Guidelines were published by the federal regulators in December 2010, providing clarification to compliance requirements relating to appraisals and evaluations, when an appraisal is required, when an evaluation may be used in lieu of an appraisal, the content of an evaluation which now includes knowledge of the property condition and a statement of most probable market value.

One of the more significant clarifications by the agencies is found in the Chapter XVI (Third Party Arrangements) where the agencies made it crystal clear that a lender outsourcing any part of the collateral valuation function should exercise due diligence in the selection of a third party and that the institution should be able to demonstrate that its policies and procedures establish effective internal controls to monitor and periodically assess the collateral valuation functions performed by a third party.

The Guidelines also state that an institution is responsible for ensuring that a third party selects an appraiser or person to perform an evaluation who is competent and independent, has the requisite experience and training for the assignment, and thorough knowledge of the subject property’s market

GSE Involvement: The Unofficial Regulators
I ronically, although not considered law or regulation, the guidelines published by the GSEs, and most notably Fannie Mae, have a major impact on the acceptability of appraisal reports generated for mortgage lending and at the present time have as much impact on the development of appraisals as the Uniform Standards and state regulations.

In 2009, Fannie Mae published the first set of Unacceptable Appraisal Practices, which have since been modified, expanded, and included in the current Fannie Mae Selling Guide available on their website.

In September 2011, Fannie Mae implemented the Uniform Collateral Data Portal and Uniform Appraisal Dataset (UAD) intending to standardize data contained in appraisal reports electronically submitted through their data portal.

According to individuals at Fannie Mae, so far over 14 million appraisal reports have been transmitted through the data portal, allowing the analysts to slice and dice the data. Using advanced technology, the analysts at Fannie Mae have been able to develop a comprehensive risk management tool, and on January 26, 2015, Fannie Mae released the Collateral Underwriter making it available to Fannie Mae’s Corresponding Lenders

It is the opinion of many in the industry that Collateral Underwriter is the next paradigm in the industry. Lenders now have access to massive amounts of data and analytics to assess risk in the valuation reports being electronically submitted through the data portals. The data, analysis and conclusions of an appraiser are being captured in real time and compared to the selection and analysis, of that same data used by their peers through the application of proprietary analytical models to analyze key components of the appraisal including data integrity, comparable selection, the adjustments, and reconciliation.

The communications from the lenders and their review staff back to the appraisers are not about whether they are in compliance with a federal or state law, or in compliance with USPAP, but rather whether the data in the appraisal report is consistent or inconsistent with Fannie Mae’s proprietary database information and consistent or inconsistent with the way in which the appraiser’s peers used and analyzed the same data. It is about degree of risk, not compliance with laws and regulation, yet CU will have more impact upon the development of appraisals than any other law or regulation since creation of appraiser state regulatory agencies.

A Look Ahead: The Next Wave of Appraisal Regulations
While the appraisal industry has come a long way from its Wild West roots of little oversight, this does not mean that further regulations won’t continue to shape the industry. The regulators are currently finalizing the Rulemaking pertaining to appraisal management companies, which was a requirement included in the Dodd-Frank Act.

In addition, the Appraisal Standards Board published the most recent version of USPAP in January 2014, with the next revision to become effective January 1, 2016. Additionally, the Appraiser Qualifications Board implemented a college degree requirement for certified appraisers effective January 1, 2015 and moved back the requirement for background checks to January 1, 2017.

This article was first published in the March edition of the MReport here. For more digital magazines from the MReport visit

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About Greg Stephens

Greg Stephens
Greg Stephens, SRA, MAA, CDEI, is a recognized subject matter expert in appraisal regulations and standards whose 37 years in the industry include owning a regional appraisal firm in Northern California, national lender QC/compliance and most recently as Chief Appraiser, SVP Compliance for Metro-West Appraisal Company LLC.

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  1. Avatar

    If more regulations equaled better appraisers, then appraisers should be viewed as “Perfect” and be left alone. Instead all we get is more and more regulations that solve no problems and actually create more problems.

    The profession is not broken because of appraisers, the system is broken because everyone can regulate us, and anyone not happy can make our lives hell if we don’t hit the value. What we need is to be left alone. We are the only entity in the loan process that is objective.

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      Amen. I’m to the point where I get a knot in my stomach every time I send a report. Will the AVM agree with me ? Will my so called “peers” (who travel from another state) agree with me ? Will I get nasty phone calls and emails from realtors and loan officers because they don’t like my value and then tell me “I don’t know what I’m doing?”. Don’t mean to vent, but that’s how I feel anymore. I’m sick of hearing “what’s your fee and how fast can we get the report back”. .

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        I appraised for a number of years before certification, USPAP, and appraisal boards. I feared no one, and never felt pressure. Since all the regulation was instated, I’ve had complaints filed, been dropped from lists for not making values, been sued, threatened with law suites, and to put the icing on the cake, last week an irate seller threatened to come and shoot me because the appraisal did not hit the contract price. Yeah, we have it good now./sarc. A simple letter to the appraisal board and their Kangaroo tribunal can end your career. And all this has empowered Realtors to whip up the parties into a frenzy against the appraiser whenever the contract price is not supported. The entire regulatory scheme is about minimizing the appraisal profession and transferring all power to the banks. They have the lobby power, we don’t. Get out while you can. If you don’t you will be eventually forced out.

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    Thanks for the non-necessary history lesson.

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    What was the real cause of this problem that we are now suffering?
    1) Government over sight: Check.
    2) Mortgage Company and Loan Officer’s arm twisting: Check.
    3) Government arm twisting to socially engineer the housing market: Check.
    4) Appraisers being able to do what they need to do without interference.

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    Rules are nothing without enforcement. USPAP is the only rule we need, yet nobody enforced it at all . It is painfully obvious when you see a fraudulent appraisal, yet the banks and Fannie Mae accepted them in mass quantities. There was not even the most basic QC being performed. The state boards were grossly under-funded and could not even deal with the few appraisals that were turned in. So we had a lot of bad eggs, and in response they passed even more rules. Nobody is enforcing these rules either, so now we get the CU from Fannie Mae. Now all of us have to waste our time answering to a dumb computer algorithm about imagined discrepancies so they can claim to perform QC. The next wave of rules will be even more complicated and they won’t be enforced either.

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    And, they (lenders, regulators, AMC’s, legislators, state boards, secondary market, etc.) still don’t get it that they are the problem, not the appraisers. Don’t agree? Pretend appraisers didn’t even exist. Now, tell me that the lending industry wouldn’t have created the 1980’s S&L “crisis”, wouldn’t have created the worldwide crash of 2007/08 and aren’t creating the next imminent crash as we speak.

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    Wow. jd1958 hit the nail on the head with the question “What was the real cause of this problem that we are now suffering?” I’ve been beating that drum since the melt down. I love how all fingers pointed at appraisers when the bottom fell out . Of course everyone truly responsible jumped on board blaming the appraisers (who of course were painted as unethical, uneducated, incompetent morons). Funny thing that a person stops making their mortgage payment and the appraiser is blamed…Not the person who stopped paying their mortgage payment. Not Fannie Mae and the bank that decided it would be wise to make loans with no income verification or documentation. No, they get to point the finger at us, and to tell us we need to be more educated and regulated.
    Does anyone else notice that every trade magazine, email, etc. is full of negativity in regard to our profession? Every article is how not to get sued, how to avoid having the State come calling, how to deal with AMC’s etc., etc. I can’ recall the last time I saw something positive. Why in the world would someone go to college for 4 years to become part of this?
    I think the writing is on the wall. Wake up.

  7. Avatar
    Russell Jakubauskas

    All hail Greg The Clueless, an apparent supporter of the spineless and irrelevant Appraisal Institute. The Institute abandoned the real appraisers decades ago and has been essentially silent while FNMA and FHLMC have taken over appraisal regulation in order to make over property valuation into a slave to the wants and needs of the lenders. It just seems odd that, without getting too deep into personal religious beliefs, the Christian Bible tells a story of Jesus ridding the temple of a certain type of miscreant. If you read this story, you’ll find that Jesus chose not to banish the murderers, nor the rapists, nor the adulterers, nor the thieves. He chased out the money lenders. Makes one wonder why this group was singled out to the exclusion of all other types of “sinners”. Maybe its time the appraisers chased the money lenders out of the appraisal regulation business, don’t you think? Until we do that, we will remain subservient to the lenders, serving only their needs and providing a convenient scapegoat every time the lenders try to sink the world economy through their self serving avarice. Appraisers, take back your profession!

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    If we had only been part of the national appraisal organizations? That’s total BS. They have done nothing to protect the industry except tried to limit competition, INCLUDING any appraisal group that wasn’t them. And we can thank them for the AI ready forms. And their help in developing USPAP which is about as real world useful as the Internal Revenue Code.

    Come on back into the trenches instead of telling us how wonder CU is going to be. We are dealing with conflicting information from various sources and a giant data base with input is going to get even more conflicting data. One thing hasn’t changed in computing – garbage in – garbage out.

    And states are regulating AMCs? Big whoop. It only works IF anybody actually ENFORCES the law. The law here is that AMCs are required to pay the appraiser market fee. They laugh at that and just call the next fool. I’m still getting calls that want me to work for fees we made 20 years ago.

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    “The other 70 percent had no affiliation with a professional appraisal organization and as such were accountable to no one other than their clients, and the only consequence for unethical or incompetent behavior was possibly the loss of business.”

    I appraised in those days. Your clients lent their own money and had to trust you or else they would end up losing money. There was no pressure, no license to lose, no board to complain to and you could stand by your work without worries. There is much more pressure now. Government licensing and oversight just gave power to those with interest opposed to those of appraisers. Unfortunately, people learn from early on in life that the government is their protector and run there for everything. Remember “a government big enough to give you everything you want is big enough to take away everything you have.”
    This little history lesson could be titled “The road to Hell”. The missing chapter is how the appraisal profession is finally regulated out of business. Thank you Big Brother!

  10. Avatar
    Russell Jakubauskas

    Dear John Appraiser: I have been a full time appraiser since 1969 and have gone through all of the recessions and crises since that time and my experience was definitely not the same as yours. I’m not sure exactly what point you are trying to make, but most of the conventional lenders I dealt with had one agenda, which was “lend out the money as fast as possible and don’t let the appraisal get in the way”. An ongoing joke in “the old days” was that we were asked to do a lot of MAI appraisals(Made As Instructed), and if you didn’t go along, you lost a client. There were ethical lenders, but they were the exception, rather than the rule. The reason why the system worked(to some degree)for so long without a major disaster had to do with lending regulations(yes GOVERNMENT lending regulations)which forbade the types of lending practices that created our most recent meltdowns(mid 1990’s and mid 2000’s). I disagree that if you just let the inmates run the asylum, everyone will do the right thing. Just look at Countrywide Financial, Goldman Sachs, et al. Subprime lending was the practice of giving loans to those who couldn’t possibly have qualified in prior decades. Regulation is needed, but it needs to be INTELLIGENT regulation, not that which is created solely for purpose of insuring that the snake oil salesmen make their billions by hoodwinking a naïve public.

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    Did anyone notice how many organizations were created to regulate us? Think about the waste of tax payer dollars. The trend towards big government is partly to blame thinking that the government is the answer to all of the problems in this industry. If there is anyone appraisers should answer to, it should be our state board and only our state board. And whatever happened to the liability to the underwriter who is signing off on these loans. Where is their liability. They are the ones that are giving the green light on the loan itself. The appraisal is significant part but only a part of the loan decision. A borrower’s income, liquidity and assets, and credit rating are just as important. Politics allows these boom and bust cycles and its time to start spreading the liability to those in the banks that are allowing themselves to make these loans.

    If theres a problem with the loan, its not only the appraisal. I say banks should force mortgages to be underwritten with a minimum of a 50% downpayment and finance no more than 1/2 of the loan. 50% can likely survive a major crash and will have a high likelihood of having equity left over. A 20% downpayment can be gone in a single crash as we’ve seen. I’m not a seasoned veteran but I know my financial history and the effects of our local crashes. 20%? actuallyt 30 to 40% can be gone in a year if markets are truly in a downward spiral. Its time that people realize what homeownership is really about. Its about making a big income sacrifice to invest in a true asset that requires your hardwork and attention for a long period of time. It requires savings. But the effect of inflation today makes it almost impossible for the typical American to be a homeowner. And banks are making loans at a high rate AGAIN?

    You almost think that our industry is purposely put into these situations so that we are swept aside. FINE, let the AVM’s have the valuation industry. Lets see what happens when the banks and everyone starts suing them for unreliable valuations. I’d love to see big AVM companies reaction to real liability.

  12. Avatar

    I think some commenters have on rose colored glasses about the past. Lenders did sometimes pressure appraisers to “hit the numbers”. An appraiser could knuckle under or resist. It didn’t take long for an appraiser to get a reputation. Of course, you did lose clients on occasion, but there was a decent space for highly competent and ethical appraisers to make a good living. Appraisers who willingly gave in to lender value pressure were (in our town) known a “whores” – an ugly term but commonly used by lenders and Realtors as well as appraisers. And everyone knew who they were.
    Today, there are still plenty of bad actors, but now they are all licensed and presumed to be equal to good appraisers. Most AMC’s seem to have little interest in an appraiser’s competency or reputation. Mostly, there are only two questions: how much and how long – usually in that order.
    As for CU, it seems to be mostly counter productive, emphasizing form filling as opposed to accurate appraising. Appraisers are now so hamstrung that they sometimes find it impossible to report their best estimate of the value of a property because of a lack of “proper” support (or an unwillingness to lose money jumping through all of the hoops CU has set up). Accurate appraising will never be increased by massively increasing busy work, no matter how much regulator wishing takes place.
    Some day, perhaps, lenders will once again hire the best appraisers and just let them do their jobs in conformance with USPAP. If that happy day comes, appraisals will cost less, be ready sooner and will be more accurate. But I’m not sure I’ll see it in my lifetime.

  13. Avatar
    Retired Appraiser

    Join the SPCA (Society To Prevent Cruelty To Appraisers). They’ve taken an interest in you animals lately.

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