What is, and isn’t, an FRT, and why does it matter? Federally Related Transactions (FRTs) are a commonly misunderstood aspect of the appraisal regulatory system. According to A White Paper on the Federal Banking Agencies’ Arbitrary and Capricious Efforts to Exempt the Vast Majority of Federal Real Estate Related Financial Transactions from Title XI of FIRREA’s Appraisal Reform, published by ASA and NAIFA in 2016, “The banking agencies…[take] the position that the vast majority of real estate related financial transactions in which the government has a safety and soundness or a consumer protection responsibility are exempt from Title XI.” We sat down with John Russell, Senior Director of Government Relations and Business Development for the American Society of Appraisers, for some more information on this hot topic.
Buzz: Thank you for joining us. Can we have your background in this industry?
John: Sure. I’ve been with ASA since October 2009, working on a wide range of issues affecting the appraisal profession. I was lucky to be involved, for example, in efforts surrounding Title XIV of the Dodd-Frank Act and its appraisal modernization provisions. While at ASA, I’ve also worked on issues affecting business valuation and personal property appraisal. Beyond that, I also serve as ASA’s representative to the Appraisal Foundation Advisory Council (TAFAC), and serve as TAFAC’s elected representative to TAF’s Board of Trustees.
Buzz: Why have FRTs recently become another “hot button” issue for appraisers? In what ways have FRTs recently raised issues with policies and/or appraisers?
John: I think this issue has legs because not many people, even within the regulatory community, understand why the definition is important – especially in light of the 1994 interagency regulations that to a large degree mooted the definition and, as a result, Congress’s intent when it originally passed Title XI of FIRREA.
For example, the recent North Dakota appraiser credentialing waiver only affects FRTs. But an FRT, under the 1994 regulations, essentially means the waiver only applies to portfolio loans above the residential appraisal threshold. So, what, we went through a waiver process for a miniscule amount of lending activity in the state of North Dakota? Especially when paired with the relief afforded by Senate Bill 2155, it marks a Pyrrhic victory at best. Had the parties involved understood how little the world would change under the waiver process, they may have chosen a different course of action in dealing with their issues regarding appraiser availability.
The reason, I think, we see so much attention paid to FRTs now is that many corners in housing finance are pushing for alternatives to traditional appraisals and see the current definition of FRT as a loophole through which to push those alternatives. Not that there can’t be room for different approaches, but that under the current regulatory regime there’s little pushback or disincentive for promoting alternatives.
Buzz: In what ways have you seen change between 2016 and today?
John: I think awareness is growing around how the 1994 regulations radically changed what is and isn’t an FRT, and the impact that definitional change has on the entire regulatory system. On some level, it begs the question of whether and when Congress will revisit appraiser regulation and recalibrate so that we don’t see only 8-12% of all mortgage lending activity fall under what was, at the outset, intended to be a broad definition. That, coupled with the ongoing effort to raise the appraisal threshold well beyond its original, de minimus, intent cries out for legislative action.
Buzz: The interpretation of Title XI is what allowed FRTs be as widespread of a problem as they are today. Could you elaborate further on their interpretation versus everyone else’s?
John: It’s not so much an interpretation problem as an intent problem. The plain language of the 1994 regulations makes it clear that the reason for such broad carve outs from the definition of FRT at the time was to clarify when an agency or entity compliant appraisal would suffice in lieu of one that complied with Title XI of FIRREA. Over time, however, some have used the 1994 regulatory action not only to undermine the use of appraisals, but to argue for exempted entities to take positions on collateral valuation that simply don’t line up with the original intent of Congress. I also worry about how, in FRT-only licensing states, this narrow view impacts both the necessity for and oversight of licensed and certified appraisers.
Buzz: How can appraisers become involved and show their opposition to these types of issues?
John: My view is that issues such as FRT and the threshold are symptomatic of the need for a rethink of appraiser regulation. If Congress in 1989 had any idea how badly both of those provisions would be abused to, essentially, gut their intent, I’m sure they would have used a different approach to establishing where and when Title XI would apply. It’s absurd to me that not one government guaranty program is an FRT, when it smacks of exactly what a “federally-related transaction” ought to be.
So, the question is what should the ambit of a new regulatory system look like? To me, it has to capture the majority of transactions where taxpayer funds are exposed to risk, allowing for flexibility on truly low dollar loans and those where creditworthiness is so good that default risk is low. Of course, with changes at the GSEs both in terms of the willingness to let the QM “patch” expire and a possible return to privatization, how you fully capture that risk will depend on where that process sits.
On an in-the-field level, I think the best thing appraisers can do is get educated on how things like the 1994 regulations and the proposed increase to the appraisal threshold flips what was originally intended by Congress, and speak about these challenges to other parties in the transaction so they too can become better aware of the current circumstance. The way this will become something Congress has to deal with is when enough participants – appraisers, agents, and lenders – understand what these changes mean for risk, both to the market broadly and to them individually.
Thank you again to John Russell for answering our questions and giving us some insight. Have any comments or would you like to submit an article of your own? Email firstname.lastname@example.org for more information.