GAO Study of the Real Estate Appraisal Industry
June 2003
This study was eagerly awaited by many of us. Having read this study with interest, it may be useful to summarize some of the key points.
The General Accounting Office (GAO) serves an opportunity federal government function in overseeing and studying various aspects of government. Congressional interest in the efficacy of appraisal licensing prompted this particular study.
The GAO recently completed this study, known ass “Opportunities to Enhance Oversight of the Real Estate Appraisal Industry.” This report is labeled GAO-03-4040, the entirety of which can be obtained as a .pdf file from
www.gao.gov/cgi-bin/getrpt?GAO-03-404. The full report is available, including the scope and methodology.
Why did GAO do this study? To paraphrase its introduction, the advent of appraiser regulation due to the passage of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 dramatically altered the lending and appraisal industry.
There was concern that licensing was not having the desired effect of improving the quality of appraisers and appraisals. Interested parties were worried that the regulation of appraisers was not having desired effects and that increased regulation was proving a burden without resulting in concrete benefits to the banking system and to consumers.
Again to paraphrase the study, some concluded that Title XI has become obsolete since those problems Title XI was intended to address—the risk to federal deposit insurance funds and the lack of uniform standards and qualifications—no longer exist. Others have argued that the law’s purpose and scope should be expanded to encompass a wider number of transactions.
In order to help Congress better understand these issues, GAO looked at the roles of the private, state, and federal entities that oversee the appraisal industry, the challengesTitle XI presented to these entities, and industry participants’ concerns about the effectiveness of the Title XI regulatory structure.
What did GAO discover in the course of its study. Again, the study explains itself better than I can.
Title XI created a complex oversight structure for real estate appraisals and appraisers that involves private, state, and federal entities. The Appraisal Foundations’ Appraisal Standards and Appraisal Qualifications Boards, referred to in the study as “private” entities, establish uniform rules for real estate appraisals and set minimum criteria for certifying appraisers. State regulatory agencies certify appraisers based on these criteria. Federal financial regulators oversee financial institutions’ use of appraisals, and a federal agency, the Appraisal Subcommittee, monitors and coordinates the functions of the parties involved in regulating appraisals and appraisers.
All of these entities except the federal financial regulators identified potential impediments to carrying out their Title XI responsibilities. The two private entities stated that fund limitations could impede their ability to ensure that development of standards and qualifications evolve with changing conditions. The report goes on to state agencies said that funding shortfalls hindered their ability to enforce compliance. Appraisal Subcommittee staff reported that rule-making authority and additional enforcement sanctions could facilitate its oversight of state compliance with Title XI.
Industry participants have raised concerns about aspects of the Title XI regulatory system for appraisers. They cited differences in state regulation that affect 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 participants felt that states, traditionally involved in regulating professions, alone should regulate the appraisal industry. Others felt that the current structure needed a significant overhaul to become effective.
The GAO recommends the following: “among other things, the Chairman of the Appraisal Subcommittee
should:
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develop and apply consistent criteria for determining and reporting states’ compliance levels with Title XI;
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explore potential options for assisting states in carrying out their Title XI activities, particularly for investigating appraiser complaints; and
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explore alternatives for providing future Title XI grant funding to the Appraisal Foundation and its two boards.
Comments & Conclusions. Critics of the current licensing system are likely to find little in this study to support the argument for dismantling or radically changing the system. While the GAO does not find the current system dysfunctional, it indicates that the current setup is inefficient, underfunded, and capable of improvement. Areas of particular concern include the expensive and inefficient method of appraisal education, the difficulties in working across state lines due to the patchwork state by state regulatory apparatus, and the underfunding of state enforcement and investigative functions.
Proponents of licensing can find some hope in this study. The study seems to indicate that licensing appears to have a desirable effect in maintaining minimum levels of appraiser competency. The study also appears to indicate the the deminimis threshold tends to exempt a large number of transactions from minimum USPAP requirements, possibly to the detriment of the process.
The Appraisal Foundation is generally credited with providing adequate guidance. The Appraisal Subcommittee is also given credit. However, the study indicates that greater clarity is needed in order to properly guide licensees, consumers and state boards.
What can the average appraiser or appraisal user take from this study at first blush? Since the study did not provide any thunderbolts from the blue, the first reaction many have to the conclusions is a shrug of the shoulders. “Okay, it’s looks like it’s not broken.... so don’t bother with too much fixing and let’s get on with business as usual.”
The system may not be broken, but the study indicates that there are real areas of concern, particularly in the potential for improvement of enforcement and oversight activities, of clarifying state regulatory responsibilities under Title XI, and for providing better funding mechanisms for the Appraisal Foundation and its two boards.
For those in favor of licensing and interested in refining and expanding its positive aspects, the study can be judged a success. Taken with other recent reports from HUD, some progress may be discernable towards better support of the appraisal profession. However, there is a long way to go to ameliorate the kind of pressure that many appraisers face in their day-to-day practices and to develop a profession that produces appraisers that are competent and able to perform independently, objectively, and without accommodation of personal interests.
William J. Pastuszek, Jr., MAI, heads Shepherd Associates, a real estate valuation and consulting firm located in Newton, Massachusetts. The firm specializes in providing real world answers throughout New England to a wide variety of local, national, and international clients.
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