    [Senate Hearing 108-869]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-869

                       THE REAL ESTATE APPRAISAL INDUSTRY
    =======================================================================

                                    HEARING

                                   before the

                   SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

                                     of the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                       ON

       CERTAIN PRIVATE ENTITIES AS OUTLINED IN TITLE XI OF THE FINANCIAL
       INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989, THAT
      ESTABLISH UNIFORM RULES FOR REAL ESTATE APPRAISALS AND SET MINIMUM
                       CRITERIA FOR CERTIFYING APPRAISERS

                                   __________

                                 MARCH 24, 2004

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

       Available at: http: //www.access.gpo.gov /senate /senate05sh.html

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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      RICHARD C. SHELBY, Alabama, Chairman

    ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
    WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
    MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
    CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
    RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
    JIM BUNNING, Kentucky                EVAN BAYH, Indiana
    MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
    JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
    ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
    LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

                 Kathleen L. Casey, Staff Director and Counsel

         Steven B. Harris, Democratic Staff Director and Chief Counsel

               Mark A. Calabria, Senior Professional Staff Member

                 Jonathan Miller, Democratic Professional Staff

                   Jennifer Fogel-Bublick, Democratic Counsel

                       Sarah A. Kline, Democratic Counsel

       Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                           George E. Whittle, Editor

                                     ______

                   Subcommittee on Housing and Transportation

                        WAYNE ALLARD, Colorado, Chairman

                    JACK REED, Rhode Island, Ranking Member

    RICK SANTORUM, Pennsylvania          DEBBIE STABENOW, Michigan
    ROBERT F. BENNETT, Utah              JON S. CORZINE, New Jersey
    LINCOLN D. CHAFEE, Rhode Island      CHRISTOPHER J. DODD, Connecticut
    MICHAEL B. ENZI, Wyoming             THOMAS R. CARPER, Delaware
    JOHN E. SUNUNU, New Hampshire        CHARLES E. SCHUMER, New York
    RICHARD C. SHELBY, Alabama

                        Tewana Wilkerson, Staff Director

                     Kara Stein, Democratic Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                           WEDNESDAY, MARCH 24, 2004

                                                                       Page

    Opening statement of Senator Allard..............................     1

    Opening statements, comments, or prepared statements of:
        Senator Reed.................................................     2
        Senator Miller...............................................     2
        Senator Sarbanes.............................................     3

                                   WITNESSES

    David G. Wood, Director, Financial Markets and Community
      Investment, U.S. General Accounting Office.....................     5
        Prepared statement...........................................    29
        Response to written questions of Senator Reed................    61
    Steven D. Fritts, Chairman, Appraisal Subcommittee, Federal
      Financial Institution Examination Council, Associate Director,
      Risk Management/Examination Support, Division of Supervision
      and Consumer Protection, Federal Deposit Insurance Corporation.     7
        Prepared statement...........................................    39
    Charles Clark, Real Estate Commissioner, Georgia Real Estate
      Commission, on Behalf of the Georgia Real Estate Appraiser
      Board..........................................................     9
        Response to written questions of Senator Reed................    62
    David S. Bunton, Executive Vice President, The Appraisal
      Foundation.....................................................    10
        Prepared statement...........................................    41
    Alan Eugene Hummel, SRA, Immediate Past President, The Appraisal
      Institute, Chief Executive Officer, Iowa Residential Appraisal
      Company, on Behalf of the Appraisal Institute and American
      Society of Farm Managers and Rural Appraisers..................    12
        Prepared statement...........................................    50
    Eugene G. Kaczkowski, President, American Society of Appraisers,
      Accredited Senior Appraiser, American Appraisal Associates,
      Inc............................................................    14
        Prepared statement...........................................    56

                  Additional Material Supplied for the Record

    Chart referred to by Alan Eugene Hummel, SRA, Immediate Past
      President, The Appraisal Institute, Chief Executive Officer,
      Iowa Residential Appraisal Company, on Behalf of the Appraisal
      Institute and American Society of Farm Managers and Rural
      Appraisers entitled, ``Appraisal Regulatory Structure''........    64
    Letter from Charles Clark, Real Estate Commissioner, Georgia Real
      Estate Commission to Senator Allard dated April 5, 2004........    65
    Statement of Francois K. Gregoire, Chairman, Florida Real Estate
      Appraisal Board................................................    67
    Letter from Robert A. Keith, Administrator, Oregon Appraiser
      Certification and Licensure Board dated March 26, 2004.........    89
    Letter from Stewart A. Leach, Program Administrator, Colorado
      Board of Real Estate Appraisers to Senator Allard dated March
      18, 2004.......................................................    90
    Statement of the National Association of Realtors'....    92

                                     (iii)

                       THE REAL ESTATE APPRAISAL INDUSTRY

                                  ----------

                           WEDNESDAY, MARCH 24, 2004

                                   U.S. Senate,
            Subcommittee on Housing and Transportation,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.

        The Subcommittee met at 2:33 p.m., in room SD-538, Dirksen
    Senate Office Building, Senator Wayne Allard (Chairman of the
    Subcommittee) presiding.

               OPENING STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. The hearing will come to order.
        I would like to welcome the panel, and as you can tell, we
    have some interest here on the Subcommittee about your subject
    matter today. We are looking forward to this afternoon and
    hearing from the panel. I would like to thank everyone for
    attending today's oversight hearing on the real estate
    appraisal industry.
        Similar to the Global Crossing and Enron scandals of recent
    years, the 1980's brought the savings and loan scandal squarely
    before Congress. While the causes were numerous, the role of
    bad real estate appraisals could not be dismissed. Accordingly,
    when Congress drafted the Financial Institutions Reform,
    Recovery, and Enforcement Act, FIRREA, it included Title XI to
    create a new structure for the real estate appraisal industry.
        It is certainly appropriate for Congress to become involved
    in the appraisal industry because of the clear Federal
    interest: Taxpayer dollars are at stake. In fact, the purpose
    of the law is to protect Federally insured financial
    institutions, not consumers. While a healthy industry can be of
    assistance to both, we must be ever mindful of protecting
    taxpayer dollars.
        The new law looked at both sides of the industry for
    addressing both real estate appraisals and real estate
    appraisers. To do so, it utilized a complex relationship
    between Federal, State, and private entities. This relationship
    seems to have worked well in that it has stemmed the worst
    problems of the 1980's. However, that does not mean the law
    cannot be improved.
        We are here today to get an update from the key players
    regarding the functioning of Title XI as well as their general
    views on the state of the industry.
        First, we will hear from Dave Wood of the General
    Accounting Office. GAO completed a report on the real estate
    appraisal industry last year. He will be discussing their
    findings.
        Next, we will hear from Steve Fritts, who will be
    testifying on behalf of the Appraisal Subcommittee of Federal
    Financial Institutions Examination Council. The Subcommittee is
    responsible for monitoring Title XI compliance by all Federal,
    State, and private entities.
        We will hear from Charles Clark, who is the Georgia Real
    Estate Commissioner and is here on behalf of the Georgia Real
    Estate Appraisers Board.
        We will then hear from Dave Bunton of the Appraisal
    Foundation. The Appraisal Foundation is the private nonprofit
    entity charged with establishing uniform minimum criteria for
    appraiser certification and uniform standards for appraisal
    practice.
        The next witness will be Alan Eugene Hummel, testifying on
    behalf of the Appraisal Institute. And finally, we will receive
    testimony from Eugene Kaczkowski on behalf of the American
    Society of Appraisers.
        Before we begin, I would like to take a few moments to
    acknowledge my colleague from Georgia, Senator Miller. Senator
    Miller has been very interested in the issue of real estate
    appraisals for some time and has been quite active. In fact, I
    should point out that the GAO report I mentioned earlier was
    done at his request, along with that of Senator Sarbanes. I
    appreciate my colleague's dedication to a vigorous, healthy
    real estate appraisal industry, and I commend him for his work.
    I am pleased to have him here today, and I would defer to him
    for opening comments if he would like to make a more formal
    introduction of Mr. Clark, but first I would like to recognize
    Senator Reed and other Members. We all work under the 5-minute
    rule here, which is standard in the Banking Committee.

                     STATEMENT OF SENATOR JACK REED

        Senator Reed. Thank you very much, Mr. Chairman. Let me
    commend you for holding the hearing, and also commend Senator
    Miller for his very aggressive and tenacious efforts to have
    this whole area looked at and reviewed.
        Title XI of FIRREA, as the Chairman points out, was created
    to oversee the real estate appraisal industry after the savings
    and loan collapse of the 1980's. In the last 15 years, it has
    been in operation. It is appropriate now to examine whether it
    is still working, whether improvements should or could be made
    to the regulatory structure set up for the real estate
    industry.
        I look forward to the witnesses' testimony, and again, let
    me commend both the Chairman and Senator Miller for addressing
    this very important issue, and I yield my time.
        Senator Allard. Senator Miller.

                    STATEMENT OF SENATOR ZELL MILLER

        Senator Miller. Thank you, Mr. Chairman. I would like to
    thank you, and I would also like to thank Chairman Shelby for
    holding this hearing today on the Real Estate Appraisal Reform
    Amendments.
        As has been said, Title XI was adopted in response to
    faulty and fraudulent appraisals that contributed to the losses
    that the Federal Government suffered during the savings and
    loan crisis of the 1980's. Not long after I came to Washington
    in 2000 or early 2001, Mr. Steve Patton, with Lee and Grant in
    Atlanta, first brought the real estate appraisal issues to my
    attention. Mr. Patton was concerned that the Appraiser
    Qualification Board, set up under Title XI, was setting fees
    too high for training real estate appraisers. Mr. Patton
    contacted the Georgia Real Estate Appraisers Board and they too
    were concerned.
        States have the discretion to regulate the training,
    licensure, and discipline of professions that have an impact
    upon health and safety, such as nurses and physicians, but when
    it comes to licensing appraisers, Title XI imposed many more
    demands upon the States. This is one of the issues we asked the
    GAO to look into during its study, and I look forward to
    hearing what the GAO found.
        Also Mr. Charles Clark, as you mentioned, Mr. Chairman, the
    Georgia Real Estate Commissioner, will discuss Mr. Patton's fee
    issue as well as other concerns of the Georgia industry.
        Since Title XI was enacted, no one has looked at the State
    and Federal real estate appraisal systems and the effectiveness
    of the current structure. That is why Senator Sarbanes and I
    requested the GAO study and why we asked the Committee to
    evaluate whether a Federal protection is still necessary for
    real estate appraisers, whether the regulatory structure has
    become perhaps too complex and too burdensome. I believe the
    time has come to examine and debate the issues affecting the
    real estate appraisal industry. I am pleased that the
    Subcommittee has taken the time to hold this very important
    hearing today.
        Finally, Mr. Chairman, I would like to welcome my fellow
    Georgian, Mr. Charles Clark, the Georgia Real Estate
    Commissioner, who will be testifying on this panel, and I thank
    all of you for being here who are going to testify.
        Thank you, Mr. Chairman.
        Senator Allard. I would like to recognize Senator Sarbanes,
    who is the Ranking Member on the Full Committee.
        Senator Sarbanes.

                 STATEMENT OF SENATOR PAUL S. SARBANES

        Senator Sarbanes. Thank you very much, Mr. Chairman. First
    of all, I want to thank you and Senator Reed for holding this
    very important hearing, and also I want to thank Senator Miller
    for his strong interest in this issue. I joined with him in
    asking the GAO to do this study, and you will be hearing about
    that shortly.
        I also want to express my appreciation to the members of
    the panel.
        Unfortunately, I am not going to be able to stay because,
    as we all well know, I have conflicting engagements, but I did
    want to come if just briefly and make a statement because of
    the importance I attach to this issue of home appraisals.
        In Baltimore City, which I am pleased to represent, and in
    fact where I live, we have been plagued by the problem of
    property flipping joined with predatory lending. This extremely
    noxious combination has resulted in neighborhoods that have
    been decimated by high levels of foreclosures and
    disinvestment, leaving the families who have been victimized by
    this scandal, families often headed by low-income, single,
    working mothers, without a place to live and with a credit
    profile that has been destroyed.
        Regrettably, Baltimore has suffered from this problem at a
    scale greater than most other cities in large part because of
    the role of some unscrupulous appraisers. Testimony given by
    the Assistant U.S. Attorney Joe Evans to the Baltimore
    Predatory Lending Task Force has been clear on this point. Mr.
    Evans said that bad appraisers are the enablers of this
    destructive and criminal process.
        We are in the course of cleaning it up, thanks to the
    Predatory Lending Task Force and the very active work of the
    U.S. Attorney's Office.
        This, in short, is how it works. An investor buys a
    foreclosed property for very little money, perhaps $20,000 or
    $25,000. He then makes very superficial repairs, if he makes
    any repairs at all; finds an unsuspecting homebuyer, often a
    person who cannot really afford or is not really prepared for
    homeownership. At the center of the scam is the unscrupulous
    appraiser, who is in on the fraud and appraises the property
    for $65,000, or $70,000. With that appraisal in hand, the
    investor helps the buyer qualify for a loan.
        As soon as a problem pops up, a boiler breaks, a roof
    leaks, or the like, the homeowner finds herself in deep trouble
    and often defaults on the loan. The house is then sold at
    foreclosure sale for far less than the sales price, obviously,
    and the whole process starts again, resulting in further
    community disinvestment.
        According to the U.S. Attorney's Office, once these
    property flippers identify an appraiser who is willing to
    participate in this outrageous behavior, that appraiser is then
    used in property after property by one bad investor after
    another. Now, these people are being prosecuted as they should
    be.
        Further, I have spoken to a number of very reputable
    appraisers in Maryland who abhor and condemn this process, and
    who are working hard to eliminate these bad actors from their
    midst, but they need help.
        Mr. Chairman, I commend you and Senator Reed for
    undertaking this hearing. We need to get a handle on this
    problem. I appreciate the work that the GAO has done to look at
    this issue. It is clear the current system is not fully
    adequate to the task, and I look forward to reviewing the
    testimony and the record of this hearing to see what steps may
    be appropriate for us to take at the Federal level, and what
    additional steps State and local authorities may take, and
    indeed, what steps the industry itself can take to, in effect,
    carve this pernicious behavior out of its midst. It is strongly
    condemned by all the reputable people in the appraisal industry
    as you would expect it to be, and I welcome that condemnation,
    but we have to figure out how we can get at these really bad
    apples, so they not only do not exploit people and tarnish them
    and victimize them, but also do not tarnish the workings of the
    many, many very able and dedicated people who are in the
    appraisal field.
        Thank you very much, Mr. Chairman.
        Senator Allard. I would like to call on the panel members,
    and as I mentioned in my opening comments, Mr. Wood, we will
    start with you, Director of Financial Markets and Community
    Investments with the U.S. General Accounting Office.

                  STATEMENT OF DAVID G. WOOD, DIRECTOR

               FINANCIAL MARKETS AND COMMUNITY INVESTMENT

                     U.S. GENERAL ACCOUNTING OFFICE

        Mr. Wood. Thank you, Mr. Chairman. I apologize for my
    voice. I am getting over a bad cold.
        Senator Allard. We will give you some relief on that voice.
    We will ask you to limit your testimony to 5 minutes, and then
    the rest of your statement, we will just submit that for the
    record.
        Mr. Wood. That will not be a problem.
        My statement is based on our May 2003 report, which
    addressed three broad objectives: first, to describe specific
    responsibilities of each entity involved in the oversight
    structure established by Title XI; second, to determine what
    factors, if any, these entities identify as potential
    impediments to carrying out those responsibilities; and third,
    to identify concerns of the entities or industry participants
    about the effectiveness of the existing regulatory structure.
        Regarding the first objective, Title XI specifies roles for
    private, State, and Federal entities. Instead of tasking a
    Federal agency to establish standards for appraisals or
    competency requirements for appraisers, Title XI recognized the
    work of two private organizations. These are the Appraisal
    Standards Board and the Appraiser Qualifications Board, which
    operate as part of the nonprofit Appraisal Foundation.
        The Standards Board publishes uniform standards for the
    conduct and writing of appraisals. Title XI provides for all
    appraisals used in Federally related transactions to be
    prepared in accordance with these uniform standards.
        The Qualifications Board establishes education, experience,
    and examination requirements for several categories of
    appraisers. Title XI does not require that all appraisers
    involved in Federally related transactions meet the
    Qualifications Board's criteria. Rather, it requires, with some
    exceptions, that such appraisers be either certified or
    licensed. The Qualifications Board's minimum criteria are used
    to certify appraisers.
        Under the Title, States have the important responsibility
    of licensing and certifying appraisers. The States establish
    their own licensing criteria. The States are also responsible
    for monitoring and supervising compliance with appraisal
    standards.
        At the Federal level, the five financial institution
    regulatory agencies are responsible for ensuring that the
    banks, thrifts, and credit unions they supervise comply with
    Title XI requirements. Among other things, these regulators
    specify which Federally related transactions require the
    services of certified appraisers, licensed appraisers, or
    neither.
        And finally, another Federal agency, the Appraisal
    Subcommittee, is responsible for monitoring the implementation
    of Title XI by all parties, private, State, and Federal. Among
    other things, the Subcommittee periodically reviews each
    State's certification and licensing program, is authorized to
    make grants to the Appraisal Foundation to help defray the cost
    of the two boards, and is required to monitor the practices,
    procedures, and activities of the Appraisal Foundation.
        Regarding our second objective, officials of these entities
    described several factors that could constrain their ability to
    carry out their Title XI responsibilities. For example,
    officials of the Standards Board and the Qualifications Board
    stated that insufficient Federal grants could impede their
    future ability to ensure that standards and qualifications
    evolve with changing marketplace conditions.
        State appraiser agencies, which we surveyed with a
    questionnaire, reported resource limitations as their primary
    impediment. As an example, 26 States reported having an
    insufficient number of investigators.
        Finally, the Appraisal Subcommittee reported that
    additional enforcement sanctions could help its efforts to
    oversee State compliance. We did not assess the extent to which
    these factors would impede the goals of Title XI, but did add
    contextual information where possible.
        In response to our third objective, we identified a number
    of concerns, including: The lack of a national qualifications
    standard for licensed real estate appraisers and other
    differences among State licensing programs; the cost and lack
    of uniform approval processes for appraiser education courses;
    the potential reluctance of lending institutions to make
    referrals of questionable appraisals they identify to the
    States for action; and a lack of consistent and effective
    enforcement actions by the States on cases that are referred.
        Many of these concerns reflect the almost inevitable
    tension that exists when a statute attempts to balance both
    Federal and State interests. We noted no clear consensus on the
    need for or impact of possible changes to the overall
    regulatory structure. However, we did identify actions that we
    believe could enhance the effectiveness of the existing
    structure.
        Accordingly, we recommended that the Appraisal
    Subcommittee, among other things, develop and apply consistent
    criteria for determining and reporting the States' compliance
    with Title XI, explore options, including drawing on its
    surplus, if necessary, for future grants to the Appraisal
    Foundation, and to coordinate with Fannie Mae, Freddie Mac, and
    HUD to improve the process of referring problem appraisals to
    the States for enforcement. The Subcommittee has reported that
    it is acting on these recommendations.
        Mr. Chairman, that concludes my prepared statement. I will
    be happy to take questions.
        Senator Allard. Thank you. You stayed pretty well within
    our 5-minute limit. The timer that we have up here, when the
    caution light turns on--you have one there on your table--it
    gives you about a minute to wrap up. It turns at four, and then
    at five.
        Mr. Fritts, you are next. Mr. Fritts is Associate Director
    of Risk Management/Examination Support Division of Supervision
    and Consumer Protection, Federal Deposit Insurance Corporation,
    and you are testifying as Chairman of the Appraisal
    Subcommittee of the Federal Financial Institutions Examination
    Council.
        Mr. Fritts.

                     STATEMENT OF STEVEN D. FRITTS

                   CHAIRMAN, APPRAISAL SUBCOMMITTEE,

           FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

                          ASSOCIATE DIRECTOR,

                  RISK MANAGEMENT/EXAMINATION SUPPORT,

            DIVISION OF SUPERVISION AND CONSUMER PROTECTION,

                 FEDERAL DEPOSIT INSURANCE CORPORATION

        Mr. Fritts. Good afternoon, Chairman Allard and Members of
    the Subcommittee. Thank you for the opportunity to discuss the
    current state of the appraisal industry and its Federal and
    State oversight. On behalf of the Appraisal Subcommittee, which
    I currently chair, we commend your Subcommittee's initiative to
    assess the industry.
        The Appraisal Subcommittee oversees the real estate process
    as it relates to Federally related transactions. Its membership
    includes the representatives from each of the five members of
    the Federal Financial Institutions Examination Council, which
    includes the FDIC, the Federal Reserve, the Office of the
    Controller of the Currency, the Officer of Thrift Supervision,
    and the National Credit Union Administration. Also a
    representative of Housing and Urban Development serves on the
    Subcommittee.
        Following the financial crisis of the 1980's, Congress
    passed the Financial Institutions Reform, Recovery and
    Enforcement Act of 1989, informally known as FIRREA. Title XI
    of FIRREA addressed the weaknesses regarding real property
    appraisals used in connection with Federally related
    transactions. Prior to FIRREA, appraisals for Federally related
    transactions and the appraisers who
    performed them, were, for the most part, unregulated at either
    the Federal or State level. During the financial crisis in the
    1980's, poor quality appraisals were a contributing factor to
    the numerous bank and savings and loans failures. Title XI
    sought to address the situation.
        Title XI created a unique system. As noted in GAO's report,
    Title XI created a complex oversight structure for real estate
    appraisals and appraisers that involve, private, State, and
    Federal entities. First, two private entities within the
    Appraisal Foundation establish uniform rules for real estate
    appraisals and set minimum criteria for certifying appraisers.
    Second, State regulatory agencies certify appraisers based on
    these criteria and regulate the industry within their State.
    Third, the Federal financial regulatory agencies oversees the
    financial institutions' use of appraisals.
        Title XI charged the Appraisal Subcommittee with five
    legislative mandated responsibilities: First, monitor the
    requirements established by the States, territories, and
    District of Columbia and their appraiser regulatory agencies;
    second, monitor the requirements established by the Federal
    financial regulatory agencies regarding appraisal standards;
    third, to maintain a national registry of State-licensed and
    certified appraisers; fourth, monitor and review the activities
    of the Appraisal Foundation; fifth, transmit an annual report
    to Congress regarding these responsibilities.
        The Appraisal Subcommittee is funded by a $25 a year fee
    for an appraiser to be listed on the national registry.
    Although the Appraisal Subcommittee has the authority to
    increase that fee to $50, we have maintained the registry fee
    at the same $25 that was established in 1989. The annual
    operating budget of the Appraisal Subcommittee is currently
    $2.1 million. Through automation and efficiencies, the
    Appraisal Subcommittee has reduced its staffing from 9
    employees to 7 over the 15 years of its operation, as it
    attempted to maintain a high level of operating effectiveness.
        Perhaps the most important point I would like to make in
    this testimony is that generally States do a good overall job
    of enforcing compliance with Title XI given the resource
    limitations facing most States. Although some States have areas
    that need improvement, we have found the great majority of
    States are generally complaint with Title XI. Our primary tool
    for evaluating State compliance is a 3-year on-site review
    cycle. Appraisal Subcommittee staff performs an on-site review
    of approximately 18 States or territories a year, plus
    conducting several follow-up reviews. Once we have completed
    field reviews and formally transmitted our findings to the
    States, we work with the States to ensure correction of noted
    areas of concern. Most States address our concerns in a timely
    manner. Currently, the most common problematic area involves
    complaint investigation and resolution.
        Because this area requires specialized personnel and
    expertise, it is one of the more complex and costly functions
    for State appraisal regulatory agencies. Consequently, some
    States are not as timely in their complaint investigation and
    resolution as they should be. Each year, we provide a summary
    of significant areas of concern identified in our field reviews
    in our report to Congress.
        Another one of the Appraisal Subcommittee's primary
    responsibilities is maintenance of the registry. During the
    past several years, we have made the registry available via the
    Internet to States and to the public. We added sections
    reserved for the States' only access to facilitate State
    efforts in areas such as researching the license authority of
    appraisers and determining whether an appraiser is in good
    standing in another State. We have added automated e-mail
    notification to States, lenders, and other parties when
    appraiser credentials are revoked, suspended, or when they
    expire.
        Senator Allard. Are you about ready to wrap up your
    comments there? Summarize quickly, and then we will submit the
    rest of it for the record.
        Mr. Fritts. We would offer these final comments. Some
    contend that the need for Federal law and Federal oversight of
    the appraisal regulatory system no longer exists. Given the
    difficulties we have experienced in achieving some level of
    consistency among States to better facilitate interstate
    lending and appraisal activities, we believe that a lack of
    Federal law and oversight would allow the system to become
    increasingly fragmented to the overall detriment of the
    appraisal industry.
        Considering the complexity inherent in the appraisal
    regulatory structure, this system functions reasonably well. At
    15-years-old, the appraisal regulatory system is relatively
    young. We expect continued adjustments and challenges as the
    system matures.
        Thank you.
        Senator Allard. Thank you, Mr. Fritts.
        Now we will call on Mr. Clark, Real Estate Commissioner,
    Georgia Real Estate Commission. It is always nice to have local
    elected officials come and visit us here.

                       STATEMENT OF CHARLES CLARK

                       REAL ESTATE COMMISSIONER,

                     GEORGIA REAL ESTATE COMMISSION

                              ON BEHALF OF

                THE GEORGIA REAL ESTATE APPRAISERS BOARD

        Mr. Clark. Thank you, Mr. Chairman, Members of the
    Committee. Thank you for the opportunity to present the views
    of the Georgia Real Estate Appraisers Board on how Congress
    should amend Title XI. Many other State regulators share our
    views.
        Enacted with good intentions, Title XI today unnecessarily
    imposes on appraisers an unwieldy Federal regulatory
    superstructure not imposed on other trades or professions. We
    urge Congress to replace that superstructure with a traditional
    less costly framework, one that is more consistent with the
    Tenth Amendment to the Constitution.
        Our board believes Title XI needs to change for three
    reasons. First, the Appraisal Subcommittee has met its goals.
    Title XI charged the Appraisal Subcommittee primarily, to see
    that all States regulate appraisers, and to oversee the
    development of the Uniform Standards of Professional Appraisal
    Practice. It has done so. Congress should now commend the
    Appraisal Subcommittee for a job well done and sunset its
    operations.
        Second, States can provide better regulation. States have
    many advantages over the Federal Government in regulating
    appraisers. We cite but four here: The States have over a
    century of experience in successfully regulating businesses and
    professions that affect the public interest; a State's
    regulatory mistake has negative repercussions only Statewide,
    not Nationwide as does a Federal mistake; because the States
    investigate and discipline appraisers, they can identify and
    act on problems requiring regulatory attention quicker than can
    the Appraisal Subcommittee and the Appraisal Foundation; and
    the Appraisal Subcommittee and the Appraisal Foundation have
    chosen to make policy decisions in closed-door meetings, as
    they strive, directly or indirectly, to impose one-size-fits-
    all policies on the 55 regulatory jurisdictions and
    approximately 90,000 appraisers. Such secrecy is not only
    inappropriate, but is also counterproductive because it causes
    a loss of public confidence in both the decisionmakers and the
    regulatory process.
        Our third reason for seeking change is that the negative
    unintended consequences of Title XI outweigh the positive
    results. We cite five of those here: Inhibiting the
    effectiveness of market controls in preventing poor appraisals;
    increasing the cost of regulation; requiring State governments
    to enforce criteria and standards developed by a private entity
    over which no government asserts much influence or control;
    denying over 90,000 appraisers the stakeholder rights in
    regulating their own profession that other State-regulated
    professions enjoy; and finally, profiteering by the Appraisal
    Foundation. We cite but one example here. Georgia's appraisal
    schools tell us that they must pay the Appraisal Foundation at
    least $38 each time an appraiser takes a course on appraisal
    standards. Under its putative Title XI authority, the Appraisal
    Qualifications Board, a Foundation subsidiary, forces all
    appraisers to take that course as a condition for becoming or
    remaining classified. By using its regulatory authority to
    enhance its financial position, the Appraisal Foundation has
    misused and abused its regulatory role to reap nearly $2
    million a year from appraisers. The Appraisal Foundation
    adopted this profiteering scheme despite the fact that the
    Appraisal Subcommittee has already paid it over $9 million in
    taxes collected from appraisers to develop appraiser criteria
    and appraisal standards.
        Redressing these problems will require redirecting the
    focus of Title XI. Thus, the Georgia Board respectfully asks
    that Congress examine broader issues than those addressed in
    the GAO's report, and amend Title XI, as we have suggested in
    Exhibit A of the written report that we have tendered to you
    today.
        Congress should not yield to the sirens' song that
    ``continuing Federal regulation will lead to increased quality
    in real estate appraisals.'' Quality of work product only
    improves significantly through the individual practitioner's
    effort under the stimulus of the marketplace. State regulation
    can effectively establish minimum entry requirements and is
    removing dishonest and incompetent practitioners.
        Thus, we ask Congress to end the unintended negative
    consequences of Title XI by sunsetting the Appraisal
    Subcommittee and turning appraisal regulation over to the
    States.
        Mr. Chairman, we appreciate your Committee's time and
    consideration of our views.
        Senator Allard. We will now call on Mr. Dave Bunton,
    Executive Vice President of the Appraisal Foundation.

                      STATEMENT OF DAVID S. BUNTON

           EXECUTIVE VICE PRESIDENT, THE APPRAISAL FOUNDATION

        Mr. Bunton. Thank you, Mr. Chairman, and Members of the
    Committee. The Appraisal Foundation appreciates the opportunity
    to present its perspective at this hearing this afternoon.
        Our organization serves as the private sector resource in
    our Nation's real estate appraiser regulatory system. By way of
    background, we are not a membership-based trade association,
    but rather a not-for-profit educational organization that
    serves as an umbrella group for organizations with an interest
    in valuation.
        The appraisal profession in the United States has
    traditionally been somewhat fragmented. In the interest of
    promoting consistency and uniformity in the areas of
    professional standards and qualifications, eight national
    appraisal organizations created the Appraisal Foundation in
    1987. Our mission is to promote professionalism in appraising
    in two important ways, first by setting the qualifications that
    one must meet to become an appraiser, and second, by
    establishing standards for how an appraisal should be
    performed. This is relevant because in 1989, through the
    enactment of Title XI of FIRREA, the Congress gave the
    Appraisal Foundation three specific responsibilities relating
    to the regulation of appraisers: First, that all appraisals
    performed for Federally related transactions must be in
    conformance with the standards promulgated by the Appraisal
    Standards Board of the Appraisal Foundation; second, that
    State-certified real estate appraisers must meet the
    education, experience, and continuing education requirements
    established by the Qualifications Board of the Appraisal
    Foundation; and last, the examinations used by the States to
    certify our real estate appraisers must be reviewed and
    approved by our Appraiser Qualifications Board.
        In evaluating how Title XI has performed to date, one of
    the most tangible measurements is to review the disciplinary
    action take by the States for the period of 1992 to 2002.
    During that time a total of 4,360 disciplinary actions were
    reported by the States to the Appraisal Subcommittee, and of
    these, over 1,250 were serious violations which resulted in the
    suspension, revocation, or voluntary surrendering of an
    appraiser's State credential.
        In the event that existing that alternatives to the
    existing structure of Title XI are given consideration in the
    future, it is important to keep several factors in mind. First,
    the Federal Registry of Real Estate Appraisers, maintained by
    the Appraisal Subcommittee, currently contains over 95,000
    names, accounting for individuals who hold a credential in more
    than one State, the total number of real estate appraisers is
    estimated to be approximately 80,000. We have several fine
    national appraisal organizations, and two of them are at the
    table here with us today. However, it is important to note that
    the majority of real estate appraisers in the United States are
    not affiliated with any professional appraisal organization.
    Accordingly, absent the current system, any type of self-
    regulating alternative is virtually impossible due to the fact
    that most appraisers are not subject to peer-review procedures.
        Second, regarding the possible elimination or dilution of
    the Federal oversight component of Title XI in the future, it
    is important to remember that Title XI was enacted not as
    consumer protection legislation, but rather from a safety and
    soundness perspective to ensure the integrity of the Deposit
    Insurance Fund. Absent Federal oversight, States would be free
    to establish very low threshold levels or perhaps none at all.
    Without credible enforcement, there could be a detrimental
    impact on the safety and soundness of the Nation's lending
    institutions.
        The current hybrid system of private sector expertise,
    State administration and Federal oversight ensures three
    things. One, minimum levels of competency. Two, it provides
    administrative latitude to each of the 55 States and
    territories. And three, it ensures overall accountability.
        While we believe Title XI is generally working as intended
    and should remain intact, the following recommendations are
    offered as suggested enhancements: First, provide greater
    regulatory latitude for the Appraisal Subcommittee and its
    oversight responsibilities; second, require State-licensed
    appraisers to meet the qualification and examination
    requirements of our Appraiser Qualifications Board, as State-
    certified appraisers currently do; and third, to facilitate
    interstate commerce, reciprocity among the States should be
    mandated.
        In conclusion, when recently confronted with concerns about
    the accounting profession, the Senate Banking Committee
    addressed the issue by increasing Federal oversight through the
    creation of the Public Company Accounting Oversight Board.
    Similarly, with the revelations about financial reporting
    variances at Freddie Mac, this Committee is pursuing options
    for greater Federal oversight of the Government Sponsored
    Enterprises. Fifteen years ago, when faced with a deposit
    insurance crisis, your colleagues opted to create a regulatory
    system that includes Federal oversight of the State regulatory
    programs, programs that credential the individuals who
    determine the value of the underlying assets of our financial
    institutions. To dilute or remove Federal oversight at this
    time would be sending the wrong message at the wrong time.
        Mr. Chairman, thank you for the privilege of appearing
    before you this afternoon, and we look forward to answering any
    questions that you may have.
        Senator Allard. Thank you, Mr. Bunton.
        Mr. Alan Eugene Hummel, Chief Executive Officer, Iowa
    Residential Appraisal Company, welcome. We always appreciate
    small business people showing up. I assume it is a small
    business.
        Mr. Hummel. That is correct, sir.
        Senator Allard. I know it is hard sometimes to get away
    from your business. Appreciate you being here.

                  STATEMENT OF ALAN EUGENE HUMMEL, SRA

           IMMEDIATE PAST PRESIDENT, THE APPRAISAL INSTITUTE

                        CHIEF EXECUTIVE OFFICER,

                   IOWA RESIDENTIAL APPRAISAL COMPANY

                              ON BEHALF OF

            THE APPRAISAL INSTITUTE AND THE AMERICAN SOCIETY

                 OF FARM MANAGERS AND RURAL APPRAISERS

        Mr. Hummel. Thanks you, Senator, and Members of the
    Subcommittee.
        A good appraisal is important to consumers and our economy.
    The S&L scandal led Congress to pass FIRREA, recognizing the
    importance of reliable and honest appraisals in real estate
    financing. Today, the appraisal is being swept to the
    sidelines, treated as a nuisance rather than essential. Some
    lenders propose to bundle the appraisal with other services in
    cut-rate financing packages. Others intend to off-shore that
    function. No matter how good a computer whiz, a kid in Calcutta
    cannot provide the insightful evaluations on par with
    professional appraisers who intimately know our communities.
    Whether you are buying a ranch in Durango or moving to Macon,
    you want to know that a professional who knows the territory is
    involved.
        So 15 years after FIRREA, how are we doing? Only 28 percent
    of the users we surveyed saw improvement, while fully half say
    that appraisal quality has declined. Before State licensing, 84
    percent selected appraisers based on professional designations
    and experience. Now almost 90 percent of the users find State-
    certified appraisers less qualified than those with
    professional designations, yet they assign them more and more
    of the business.
        I am afraid that the system's report card rates 5 D's and
    an F.
        Direction is the first D; we do not have it. Our chart here
    depicts the regulatory structure resembling a circular
    perpetual motion machine. Who, individually, is responsible for
    setting direction? Who, in rotating bureaucratic chairmanship,
    is the stakeholder in charge? Is it any wonder that States
    routinely ignore this flailing machinery?
        Disclosure is the second D, and again, we do not have it.
    The Appraisal Subcommittee and their civil servants hold secret
    meetings with neither input from nor access for professionals
    working in the industry. Their tardy reports to Congress are
    mere financial summaries. They do not tell us what they do,
    only how much they are billing us. They resemble the Wizard of
    Oz, warning us not to look behind the curtain.
        Discrimination is the third D. By favoring less-
    credentialed newcomers, FIRREA bizarrely discriminates against
    seasoned professionals, discouraging advanced career
    development. The professional organizations foster superior
    training ethics, yet with no incentive to excel, appraisers
    have been dropping out. Fewer than 40 percent now belong. This
    is like an employer snubbing college graduates to hire
    dropouts. Under FIRREA, ignorance is bliss.
        Discipline also fails. Left alone, the States can disregard
    appraiser discipline as a potential Federal mandate. Take New
    York, which reinstated an appraiser convicted of fraudulently
    scamming millions. At the very time the ASC was approving New
    York's program, Newsday was reporting the State routinely
    neglected or dismissed complaints. We know of similar scandals
    throughout the country.
        Duress, our fifth D, flourishes. Without effective
    enforcement, financiers still pressure appraisers to come up
    with the ``right numbers'' for their deals, just as they did in
    the freewheeling 1980's.
        The ASC's worst grade is an F for Federal/State relations.
    The ASC has no one in charge or accountable. The Federal entity
    lacks practical input from the field and effective contact with
    States. It does nothing to foster interstate reciprocity and
    little toward temporary practice licensing, an appropriate
    Federal role.
        Finally, the ASC has no real leverage to encourage State
    compliance. Its only inducement for the States to police bad
    appraisal practices have been dubbed ``the atomic bomb'' that
    would effectively blow up all Federally financed mortgages in
    the State. Nobody is going to use that and everybody knows it.
        What happens to a 15-year-old with a flunking report card?
    You might pack the kid off to military school to get some
    discipline, but yet better, how can we help them earn some A's?
    Assets, enough to do the job; access to agencies' proceedings;
    advancement of appraisers' professional qualifications;
    aggressiveness in disciplining bad appraisers while protecting
    the independence of good ones; authority to do its job; and
    most of all, accountability of State and Federal oversight to
    the public.
        Since 1935, the Appraisal Institute has advanced the
    standards of our industry, saving buyers, sellers, and
    taxpayers millions. We are now ready to work with you to craft
    a simple cost-effective and transparent legislative remedy so
    FIRREA can earn straight A's. Our system is floundering.
    Discipline and direction can help it make the grade.
        Thank you.
        Senator Allard. Now we will call on Mr. Eugene G.
    Kaczkowski, Accredited Senior Appraiser, American Appraisal
    Associates, Inc, here representing the American Society of
    Appraisers.

                   STATEMENT OF EUGENE G. KACZKOWSKI

               PRESIDENT, AMERICAN SOCIETY OF APPRAISERS

                      ACCREDITED SENIOR APPRAISER,

                  AMERICAN APPRAISAL ASSOCIATES, INC.

        Mr. Kaczkowski. Thank you very much, Senator. First of all,
    you should know that the American Society of Appraisers is a
    multidiscipline professional appraisal society. That is, we
    represent more than real estate appraisers. We also include
    business valuation appraisers, machinery and equipment
    appraisers, fine arts and antique appraisers, and gems and
    jewelry appraisers. About one-fifth of our membership is real
    estate appraisers.
        The American Society of Appraisers believes that the state
    of the real estate appraisal profession and the profession in
    general is generally good, and that the enactment of FIRREA
    continues to be a positive force in professionalizing the
    Nation's real estate appraisers.
        Today's real estate appraisers are far better educated, far
    more competent, and held to a higher standard of ethics and
    accountability than pre-FIRREA days.
        We also believe that there is room for improvement. There
    are problems with Title XI; it needs to be modernized and
    tightened in order to correct some problems that we see. Some
    of them have already been addressed by other panel members.
        We see seven issues or problems. First, the current
    membership of the Appraisal Subcommittee is drawn primarily
    from housing and banking interests. We think that is too
    narrowly drawn and lacks representation from a host of
    nonbanking Federal agencies that have a major stake in the
    integrity of real estate appraisals. These include the
    Department of Interior, the Department of Transportation, the
    IRS, the Securities and Exchange Commission, to name a few.
    They all have an interest in real estate appraisal issues.
        Problem No. 2. Regulation of appraisers by States,
    territories, and the the District of Columbia has been uneven,
    and in some cases, even ineffectual. How to correct the
    problem? Give the Appraisal Subcommittee rulemaking authority.
        Problem No. 3. What rulemaking powers are necessary? What
    we would do is have the GAO study this particular issue and
    determine how we can correct the problem of uneven and
    ineffectual regulation.
        Problem No. 4. Some States continue to resist having
    reciprocity agreements with neighboring States and to resist
    issuing temporary practice permits to duly credentialed
    appraisers. What is the solution? Have the appraiser who is
    credentialed in one State be automatically credentialed in
    another State, in other words, have a driver's license
    approach.
        Problem No. 5. Because Federal bank regulatory agencies
    have limited the mandatory application of Title XI's
    professional
    appraisal requirements to loans above $250,000 for residential
    property and $1 million for commercial property, the so-called
    de minimis rule, safety and soundness have been seriously and
    needlessly jeopardized. Once again, the GAO should be
    commissioned to analyze the effects of the de minimis rule.
        Problem 6. Two years after the enactment of Title XI there
    were amendments, and the Appraiser Qualifications Board of the
    Appraisal Foundation found itself in the anomalous position of
    having authority to establish qualification requirements for
    State-certified appraisers, but not for licensed appraisers in
    Federally related transactions. We believe that the Appraiser
    Qualifications Board should have the ability to set
    qualifications for licensed appraisers also.
        Last, because each State's appraiser licensing board
    currently must approve all primary and continuing education
    courses offered to its appraisers, hardships are imposed on
    those who offer the courses, appraiser societies, and regional
    and national education providers, who have to have these
    courses approved and registered by each jurisdiction. This
    poses an administrative hardship when the same course has to be
    approved 50 or more times. We say that a central clearinghouse
    should be established so that these courses can go to one group
    and have the necessary national approval. A good place to have
    that clearinghouse is the Appraisal Foundation.
        The report that you have expands all of these issues in
    greater detail, but I will stand for any questions you might
    have.
        Senator Allard. Thank you all for your testimony, and now
    we will proceed with questions from the Members on this
    Committee.
        Mr. Kaczkowski, you have a fifth of the appraisers in your
    association that are also in real estate. What percentage of
    the total real estate appraisers do you think that represents
    in the country? Do you have any idea?
        Mr. Kaczkowski. The only numbers I have are those that are
    provided by Mr. Bunton. I have heard those numbers before, and
    the thought is that----
        Senator Allard. Four percent?
        Mr. Kaczkowski. We have 1,000 or 1,200 appraisers out of
    approximately 95,000 that would be part of our organization.
        Senator Allard. I will be darned.
        Mr. Kaczkowski. As compared to my compadre here from the
    Appraisal Institute, we are a smaller group of real estate
    appraisers, but again, we are a multidiscipline society.
        Senator Allard. What about the Institute?
        Mr. Hummel. The Appraisal Institute represents
    approximately 24 percent of the licensed appraisers. In
    conjunction with the American Society of Farm Managers and
    Rural Appraisers, who we are testifying with, we accomplish
    probably about 30 percent.
        Senator Allard. I would suppose that those who are more
    qualified and do the better job of appraising are likely
    members of both of your groups. Would that be a fair
    assessment?
        Mr. Kaczkowski. We think so.
        Mr. Hummel. That would be a fair assessment. We have shown
    through surveys and looking at the ASC's results of those being
    disciplined, we find that those that do not belong to
    professional organizations have a higher likelihood of being
    disciplined than those that do belong to professional
    associations.
        Senator Allard. I see. I want to get to the fees. Mr.
    Hummel, you are an appraiser, so what are your fees that you
    pay to the Foundation and is there a separate fee to the
    Appraisal Subcommittee also? Give me a total of what you pay on
    fees.
        Mr. Hummel. Every time I pay my license fee for every State
    in which I am licensed, I have a $25 tax that goes to the
    Appraisal Subcommittee out of that----
        Senator Allard. So if you are, in four States, licensed
    then you pay $100 to the Federal agency or foundation; is that
    right?
        Mr. Hummel. To the Appraisal Subcommittee, that is correct.
        Senator Allard. Oh, the Subcommittee for each license,
    okay.
        Mr. Hummel. That is correct.
        Senator Allard. Is there any assessment from the Foundation
    or any other group here that you deal with?
        Mr. Hummel. No, sir. As an individual appraiser I can
    voluntarily belong to the Appraisal Foundation publications,
    but that is voluntary.
        Senator Allard. I understand, and then there is a fee for
    that publication.
        Mr. Hummel. That is correct.
        Senator Allard. Mr. Fritts, what have the Subcommittee's
    revenues been in recent years and what does it generally cost
    for the Subcommittee to operate? Can you share those figures
    with us?
        Mr. Fritts. Yes, sir. Our current budget for this year is
    $2.1 million. Our revenues are expected to slightly be below
    that expenditure amount.
        Senator Allard. what is slightly, $100,000, $500,000?
        Mr. Fritts. About $50,000 I believe.
        Senator Allard. So you have a $50,000----
        Mr. Fritts. Shortfall.
        Senator Allard. You mean you collect $50,000 less than the
    cost of running your----
        Mr. Fritts. Than our operation and the grant to the
    Appraisal Foundation, is approximately $900,000 this year.
        Senator Allard. Then you give $900,000 to the Foundation.
        Mr. Fritts. That is right, out of that $2.1 million.
        Senator Allard. And so the $50,000, where do you make up
    the difference on that?
        Mr. Fritts. We have reserves of several million dollars
    that have been built up over the years, $5 million that is the
    current reserve.
        Senator Allard. So the interest off of that reserve makes
    up the difference; is that the way that works or do you pull it
    right out of the reserve?
        Mr. Fritts. We just pull it right out of the reserve.
        Senator Allard. Does the reserve make any money? Is it
    invested anywhere?
        Mr. Fritts. I believe it is with the Treasury. I do not
    believe it is interest bearing.
        Senator Allard. It is not interest bearing. So the Federal
    Government uses that at no cost?
        Mr. Fritts. That is my understanding.
        Senator Allard. That is interesting. You did not have a
    surplus this last budget year, but you have had surpluses in
    the past?
        Mr. Fritts. That is correct, sir.
        Senator Allard. Let us put aside the issue of surpluses. Is
    it generally the Subcommittee's policy that in a single year
    the entire difference between revenues and its own operating
    expenses should be used as a grant to the Foundation?
        Mr. Fritts. No, sir, that is not how it works. Basically,
    the Foundation presents us a proposal in the fall of the year,
    which we review carefully. In past years we have sometimes
    approved less than that proposal, or sometimes we have approved
    it in its entirety. One of the GAO's recommendations was that
    we closely evaluate their proposal in light of their review,
    and if possible and appropriate, go into our reserves to help
    fund that request. This request last year, we did fully fund
    their request at $900,000, and that will result, at least in
    our budgetary process, a slight shortfall.
        Senator Allard. Do you expect the shortfall to increase in
    future years?
        Mr. Fritts. If we do not increase the fee, the $25 fee,
    which has been the same since 1989, that is entirely possible.
    Yet, with our reserve that we have there, that is still some
    time away.
        Senator Allard. Senator Reed.
        Senator Reed. Thank you very much, Mr. Chairman.
        Thank you, gentlemen, for your excellent testimony.
        One of the basic questions here is whether this authority
    and responsibility should devolve back to the States. Mr. Wood,
    in your study, GAO study, you found that the biggest constraint
    on all the regulatory bodies was a lack of funding I believe.
    Is that accurate?
        Mr. Wood. That is what the States reported was their
    biggest impediment, a lack of resources.
        Senator Reed. Which raises a question of not only the
    willingness but also the capacity of States to take up this
    extra--do you have any comments in terms of that from your
    review about the capacity of the States to do this work, not
    just one or two States that may be well prepared, but across
    the board?
        Mr. Wood. In terms of the capacity to actually do the job
    the Title requires them to do, I would say the Subcommittee is
    probably in a better position to answer you because they do
    annual reviews of the States on a rotating basis. But there are
    some data in our report that amply lays out shortfalls they are
    experiencing.
        Senator Reed. Mr. Fritts, let me raise the question with
    you about the capacity of not individual States, which I am
    sure they are well prepared, but the range of States.
        Mr. Fritts. Yes, sir. We are certainly concerned about the
    current budgetary issues, and that is one thing we are
    monitoring when we are doing our reviews. Many States are under
    budgetary pressures. We have found, however, over the 15 years,
    that States have done a very effective job. Our report results
    show that. Out of all the States that we have, we put States in
    three tiers of classification as to their compliance, and there
    are only four States and territories that meet less than really
    what we consider reasonable compliance and reasonable quality
    of their programs. That is our current statistic.
        Senator Reed. So that in your view, they do have the
    capacity?
        Mr. Fritts. Based on past experience, we believe they do.
        Senator Reed. Let me ask another question, Mr. Fritts.
    Apparently, the only real sanction you have is decertification
    of a State.
        Mr. Fritts. That is right, sir. I will say it is a very
    powerful sanction, and just the threat of it we believe is a
    very powerful inducement. We have I think a good cooperative
    relationship with the States, and our experience is that when
    we find problems, the States correct them generally in a timely
    fashion.
        Senator Reed. So you do not believe there is a need for a
    range of sanctions or authorities, that this decertification is
    adequate and sufficient and not too much?
        Mr. Fritts. I think our experience shows that it has been
    adequate up to this point.
        Senator Reed. Mr. Clark, you clearly have espoused the
    notion that Title XI should be dispensed with and these duties
    devolve back to the States. Are there any recommendations short
    of that that you would support, any other fixes to the system,
    or your position is it so broken and it has to be done away
    with?
        Mr. Clark. Senator, we think it is broken, but we would not
    recommend doing away with all of it. Our proposal specifically
    identifies the things that we would do, and while we would
    sunset the Appraisal Subcommittee and have the States to handle
    all the education and experience requirements and the
    examination requirements, there are things in Title XI that we
    think are important to retain, simplified to some degree.
        For example, we think that we should authorize lenders to
    use any classified appraiser they choose so long as that
    appraiser is classified in a State. So, for example, a lender
    who is making loans across the country on large buildings, for
    example, might hire one appraiser who happens to be licensed in
    one State, and that appraiser could do work wherever the lender
    wanted them to do, to get over this hurdle of fighting between
    the States about whether you can go across a State line or not.
    We think that Title XI should require that lenders utilize
    appraisers classified by State regulatory agencies in all
    Federally related transactions. That assures that every State
    will have an entity to license and certify appraisers. If Title
    XI did not require that, some State might decided, hey, we just
    do not want to do this. So it would be a stimulus to see that
    it is done.
        We think that all appraisals should be conducted on
    Federally related transactions in accordance with USPAP, and we
    see an important role for the Standards Board of the Appraisal
    Foundation to continue to play in establishing those standards.
    We think they should be working more directly with the
    financial institutions to accomplish that, rather than being
    paid by appraisers through the current payment system. So we
    think there are a number of things in Title XI that are very
    valuable that should remain.
        We are concerned that the regulation should go back to the
    States.
        Senator Reed. Thank you, Mr. Clark, thank you.
        My time has expired. Mr. Chairman, I assume that the
    witnesses will be available for written questions?
        Senator Allard. Absolutely. In fact, if you have other
    questions you will not get a chance to ask here, we will have
    you send those to the panel. And then if the panel would
    respond within 10 days, we would certainly appreciate it. It
    would be very helpful.
        Senator Reed. Thank you, Mr. Chairman.
        Senator Allard. Senator Miller.
        Senator Miller. Thank you, Mr. Chairman, and thank the
    panel.
        Let me ask my first question of Mr. Wood. Do you think the
    fees for training and the qualifications for licensure are
    appropriate and consistent across the country?
        Mr. Wood. The fees for licensing of course are set by each
    State. We did not collect that information. However, we did get
    information from the Subcommittee which maintains that. There
    is quite a bit of variation, and it varies depending on what
    category of appraiser we are talking about, whether it is
    licensed, a certified residential, or a certified general.
    There is a good deal of variation in terms of the time period
    that a license covers. I can just give you a flavor of some of
    the ranges that we found.
        Senator Miller. I would think the answer is no though, is
    it not? Your answer would be no, they are not consistent.
        Mr. Wood. That is correct, it is not consistent across the
    country.
        Senator Miller. How about the word that I used also,
    ``appropriate?''
        Mr. Wood. I guess appropriate, you know, in----
        Senator Miller. To the job.
        Mr. Wood. In passing Title XI the Congress left this up to
    the State, so my response would be if the State finds it
    appropriate, then I find it appropriate.
        Senator Miller. Do you think they are appropriate and
    consistent as compared with other State-licensed professional
    groups as far as your information is concerned?
        Mr. Wood. We did not compare the appraisers to any other
    professional groups.
        Senator Miller. You got a guess?
        Mr. Wood. I really do not. I am sorry.
        Senator Miller. Who is responsible for the oversight of the
    fee structure?
        Mr. Wood. Again, for licensed appraisers, it is the States.
    And actually the States also set their fees for certification.
    The Subcommittee can review them, but it has no real power over
    them.
        Senator Miller. Mr. Fritts, as we all know, Title XI was
    designed to protect the Federal Deposit Insurance Funds from
    faulty and fraudulent appraisals. On a scale of 1 to 10, is
    there still a need to protect the Deposit Insurance Funds?
        Mr. Fritts. I believe there is a need. The scale, of
    course, being a full-time employee of the Federal Deposit
    Insurance Corporation for 28 years, I feel pretty strongly
    about that, the need to protect depositors. So, I guess I would
    rate that as a 10.
        Senator Miller. Let me ask this question of Commissioner
    Clark. From your knowledge of this, and I know it is
    considerable, what other States that you know of agree with
    your view on amending Title XI, to the extent that you would
    like to see it amended?
        Mr. Clark. In the GAO report, there were some numbers that
    we found interesting, and that was, I believe, if I recall them
    correctly, there were 15 States that felt like the Appraisal
    Subcommittee needed to continue. There were 23 States, I
    believe, that sided with our view, and then 15 States that were
    on the fence on that particular issue.
        I suspect there has been some shift in that. This last
    year, for example, the Appraisal Qualifications Board doubled
    the entry requirements for licensed and certified appraisers
    beginning in the year 2008, and I suspect there will be some
    negative reaction to that.
        In terms of the States that I am aware of, people that I
    have personally spoken to, regulators in the following States
    tell me that they support our position--the States of
    Washington, Oregon, Utah, Wyoming, Colorado, Kansas, Texas,
    Arkansas, Mississippi, Alabama, Florida, South Carolina, North
    Carolina, Kentucky, Vermont and Maine.
        I cite all of those States because I think they represent a
    pretty broad spectrum of the types of States that we are
    dealing with, smaller States that will have more difficulty in
    funding their operations, as well as larger States who are not
    confronted with that difficulty, but regulators in all of those
    States have indicated to me personally that they support our
    general position.
        Senator Miller. I like leaving things up to the States, as
    you can probably imagine, but how would you--well, my time is
    up. Can I go ahead and ask this question or I can get it in the
    next round.
        Senator Allard. Go ahead. We will have another round.
        Senator Miller. How would you ensure consistency across the
    States for programs if the Federal Government gave up its role
    or is there a need for consistency?
        Mr. Clark. I think there is a need for consistency, but I
    think that takes place naturally. If you look at all of the
    other professions that are regulated and move from State to
    State, they have generally consistent requirements. Doctors and
    lawyers, despite the fact that they were all developed in 50
    different States, have come to essentially the same body of
    knowledge.
        I would imagine that suppose we just stopped tomorrow and
    pulled out Title XI altogether, I would imagine that all of the
    States would keep in place the current requirements. There
    would be some experimenting with that, and there should be some
    experimenting with that. As new ideas come along, you want to
    try those and operate differently, and that is one of the
    values of State regulation. If an individual State can try
    something new, if it works, everybody adopts it. If it does not
    work, nobody else is hurt by it. But I would fully expect the
    general requirements to stay approximately where they are now.
        Senator Miller. Thank you.
        Senator Allard. Mr. Clark, I am going to follow up on
    reciprocity. I belong to a profession, and we do national
    testing.
        Mr. Clark. Yes, sir.
        Senator Allard. When you graduate from school, you take a
    national test, and then the States decide whether they are
    going to accept the national test. In addition to that, there
    are orals that we take, and then, as a veterinarian, we pay the
    fees for the tests. Also, in our profession, it is usually
    decided at the State level, the State decides on whether or not
    they want to have reciprocity with their neighbors.
        Do you want to move toward national testing or mandates
    from the Federal Government, setting down some minimum
    standards on the States? I am trying to figure out how we can
    make this reciprocity work.
        Mr. Clark. I do not want national testing. I think it is
    important to have the flexibility of the States administering
    their own exams, and I think that is a very important thing to
    retain. However, I certainly do believe in reciprocity, and one
    of our provisions, the Georgia Board's provisions, would assure
    that reciprocity by saying that if an individual has an
    appraiser classification in Colorado, then he can be hired to
    work in Michigan, he can be hired to work in Georgia,
    California, anywhere, as long as he is classified in that
    State. That would be the stimulus from the Federal Government
    to assure the ability to work Nationwide.
        Senator Allard. But all States do not require licensing.
        Mr. Clark. It is my understanding that the Appraisal
    Subcommittee has set up licensing Nationwide. And if you are
    going to appraise in a Federally related transaction, you must
    be certified or licensed.
        Senator Allard. But there are some appraisers out there
    that would not be licensed necessarily because they would not
    be dealing with a Federal program; is that right?
        Mr. Clark. That is correct in some States. In many States,
    all appraisers are required to be classified.
        Senator Allard. I see.
        Mr. Fritts, are the Subcommittee meetings open to the
    public?
        Mr. Fritts. As far as I am concerned, they are.
        Senator Allard. I know you may be concerned and want it to
    happen, but are they open to the public?
        [Laughter.]
        Mr. Fritts. There is no Government sunshine notices for the
    meetings. We meet monthly. Since I have been chairman, this
    issue has come up, invited a number of the members in the
    appraisal industry, I think maybe even some people here at this
    table, to attend our meetings, and I certainly would not voice
    concern about moving toward that.
        Senator Allard. Are public notices put out so the public
    knows and the press knows that you have these meetings?
        Mr. Fritts. We could put it on our website.
        I will say the only part that we probably would not want
    public is where we go over the reviews of each State's
    evaluation.
        Senator Allard. You mean the State's evaluation is not made
    public? These are public officials.
        Mr. Fritts. Yes, the State report is, but in the
    discussion, the discussion of the report and the proper----
        Senator Allard. Because it involves individuals; is that
    right?
        Mr. Fritts. It involves individuals, and it is deliberative
    relative to what our responses will be.
        Senator Allard. I think that is understandable, but it
    seems to me like you could advertise them, like you say, put
    them on the Internet or something so people know that----
        Mr. Fritts. I have invited a number of people to come to
    our meetings. I certainly have no problem with it. None have
    ever taken me up on that offer.
        Senator Allard. If you have a way of putting a public
    notice out there, I would encourage you to do it. I think it
    would help.
        Now, let me see, the GAO report indicates that most
    mortgage fraud problems occur in States where licensing is
    voluntary. Mr. Wood, would you please elaborate, and do you
    believe we should move to a mandatory system?
        Mr. Wood. First of all, the data are very anecdotal, and I
    think that is one of the areas that I would say, coming out of
    our work, deserves further study. No one really knows, for
    example, how many mortgage transactions are even covered by
    Title XI; in other words, how many are Federally related. So, I
    would say that deserves more study.
        Senator Allard. Any other members on the panel that would
    like to comment on having voluntary licensing in some States,
    and do you think we should move toward a mandatory system?
        Mr. Hummel. The mandatory system concerns me under our
    current structure. If we had a mandatory system in which we had
    the Appraisal Subcommittee overseeing everything, I would have
    concerns only because the Appraisal Subcommittee has not been
    properly held accountable or provided the authority, quite
    honestly, to do their job. And so if we had mandatory licensing
    in which all of a sudden every time I did an estate appraisal
    versus a mortgage appraisal, and I was held under the Appraisal
    Subcommittee's thumb, I would be uncomfortable, and I think the
    State would also.
        Until that is remedied, I would not suggest mandatory
    licensing.
        Senator Allard. Senator Reed.
        Senator Reed. Thank you very much, Mr. Chairman.
        Mr. Bunton, in your testimony, you pointed to the
    disciplinary actions of the States between 1992 and 2002 as a
    measure of how well Title XI is doing. Do you have comparative
    data prior to the adoption of Title XI or prior to 1992 so that
    we can put that in context?
        Mr. Bunton. I do not, but it is important to note that
    prior to 1989, I believe there were only three States that were
    regulating appraisers. This was the catalyst that changed the
    landscape as far as regulating appraisers. Before that, it was
    if you belonged to a professional society, you had peer review.
    So there really is no data before this. I think Nebraska,
    Louisiana, and perhaps Florida were the only three that were
    regulating appraisers in any way.
        Senator Reed. Given this information that there are active
    States that are identifying and disciplining appraisers who are
    violating rules and regulations, I mean, one of the real
    concerns that we have is that there are, as there is in every
    line of endeavor, people who just do not follow the rules. Is
    it your opinion the States are doing an adequate job of
    enforcing their regulations or this number that you cited is
    good, but it is just the tip of the iceberg?
        Mr. Bunton. I think the GAO at one of the tables in their
    report gives a State-by-State breakdown. And if you look at
    that and the various disciplinary options available to each
    State, you can see there is a a philosophy with each State
    board. Certain States will give an awful lot of education
    instead of fines or suspensions. Others are very quick to
    suspend. That is one of the problems we have. We do not really
    have consistency in enforcement.
        Senator Reed. Again, I guess in the context of a Federal
    superstructure, at least, are you urging more consistency in
    enforcement, and this is an example of where----
        Mr. Bunton. Very much so. In fact, just from our
    organization's point of view, we put together a compilation of
    court cases and administrative rulings. We have done two
    editions now and disseminated it to the States just to show
    States how similar situations are being handled in neighboring
    jurisdictions.
        Senator Reed. Thank you.
        Mr. Hummel, thank you again for your testimony. Do you have
    any comments on this line of inquiry about the capacity of the
    States, financially, to take a more prominent role? I think Mr.
    Clark was quite eloquent in saying we do not want all of Title
    XI gone, but we want the States to have a more prominent role.
    Also the issue of are the States actively playing that role
    today?
        Mr. Hummel. The States, it varies across the board, and I
    will use an example, the State of Iowa. The funds that are
    collected from the license fee go into the general fund, not
    into that specifically for enforcement, and because of that,
    they are woefully lacking, not that they do not try. There are
    very good individuals on those State boards, the Executive
    Committee is very good, but they do not have the funds to do
    the prosecution. Many times they choose not to do the
    prosecution because it is just too costly.
        We have other States that actually have attorneys that are,
    by nature, part-time to that particular board, and they are
    charged for their pro rata share, and the attorneys are not
    interested in going forward. So it is not always a matter of
    money, but sometimes a practicality of having the
    administrative staff available.
        Senator Allard. Thank you.
        Mr. Kaczkowski, your comments.
        Mr. Kaczkowski. As I mentioned earlier, the regulation, as
    we see it, has been uneven, inconsistent, and something can be
    done about it. Give the Appraisal Subcommittee a rulemaking
    authority to settle some of these issues on just what needs to
    be done. How do you get uniformity? Some oversight board needs
    to provide that impetus.
        We have not seen uniformity in the States on the issue of
    reciprocity, much less the driver's license idea, and also, as
    I mentioned, on the education issue, where all of the States
    seem to want to approve the same course independently. There is
    no need for that. There is a better way of doing it, and that
    is why I am a little bit reluctant to provide too much power,
    if you will, to individual States because then for appraisers
    who are not local, who are not operating only in a single
    State, it becomes a relative administrative nightmare for them
    to do their job.
        For example, we operate internationally in our firm. In
    trying to comply with State licensing or certification--we do
    not have licensed appraisers, we have only certified general
    appraisers--it is very, very difficult to have an appraiser who
    is certified in 15 or 20 States.
        Senator Reed. Thank you very much.
        Thank you, gentlemen.
        Senator Allard. Senator Miller.
        Senator Miller. Let me ask this question of Mr. Wood and
    Mr. Fritts.
        Does Title XI bring Federal protection to real estate
    appraisals, especially now when so much appraisal fraud, we are
    told, is increasing?
        Mr. Wood. We do not have any data before--we cannot compare
    before and after Title XI.
        Senator Miller. We do not know?
        Mr. Wood. So, I could not say on that basis.
        Senator Miller. Do you know, Mr. Fritts?
        Mr. Fritts. I cannot say with a degree of certainty. I
    would say the fact that over 1,100 appraisers have been
    disciplined significantly in the last 13 years indicates that
    Title XI and the system that it built does have some good
    checks and balances and has improved the quality of the
    industry over that time period.
        Senator Miller. I guess this is a question for both of you,
    also, and if anybody wants to jump in and answer it and say
    what you think, let me know, also.
        What kind of data is out there on the scope of complaints
    about appraisals per appraiser?
        Mr. Wood. Actually, we have a table in our report, that I
    think was referred to earlier, that shows the different
    complaints by State. There is a total of about 4,000 or so
    complaints in there.
        Senator Miller. Is that what you were going to refer to,
    Mr. Clark?
        Mr. Clark. No, sir. I would point out something a little
    different in that line. One of the things we hope the GAO
    report would do would identify exactly how many transactions go
    on that require appraisals, and apparently that was beyond the
    scope of the report.
        But two snapshots I think are important in this. The
    Georgia Department of Banking Finance tells us that in the year
    2000, banks in the State--that is all banks, both Federally
    related and others--made 270,560 loans that required
    appraisals.
        Senator Miller. How many?
        Mr. Clark. It was 270,560 in the year 2000. Our board has
    received 83 complaints out of those 270,000. Fannie Mae filed
    860 complaints with State agencies in I think it was 2002 to
    2003 or 2001 to 2002 out of 11,700,000 mortgages they hold. So,
    if there were only 860 appraisals that they had concerns with,
    that is less than one-ten-thousandth of 1 percent. And I think
    that says that appraisers are generally doing a good job. I am
    not sure that the problem is quite as large as we may think it
    is. Clearly, we still have a flipping problem, but I think the
    States are acting on that, as it says in the report.
        Senator Allard. Mr. Fritts.
        Mr. Fritts. I agree that the industry, by and large, does a
    good job and that the problems of seriously bad appraisals is a
    relatively small minority, but any bad appraisal has serious
    consequences.
        Senator Allard. Mr. Hummel.
        Mr. Hummel. The statistics are a wonderful thing, but we
    have to be very careful because Fannie Mae did, in fact, send
    in 870 complaints, and then they stopped because they found
    that, out of those 870 complaints, such a minuscule amount were
    actually being handled by the State boards. They found that the
    State boards would not communicate with them as to what
    disposition those complaints had, either that or they would ask
    for information or personal testimony, so that the
    infrastructure of handling those complaints at the State level
    was so frustrating that they stopped turning them in.
        Senator Miller. While you are talking, let me follow up and
    ask you if you care to elaborate any more about there being
    enough funding and resources at the State level to meet the
    requirements of Title XI.
        Mr. Hummel. In fact, I believe that there is not sufficient
    funding.
        Senator Miller. What can be done?
        Mr. Hummel. Pardon?
        Senator Miller. That is what I want you to elaborate on. I
    gather that, but if not, and you believe there is not, what can
    be done? What would you suggest?
        Mr. Hummel. I would suggest----
        Senator Miller. I liked your idea of, a while ago, moving
    to Macon. If you were talking about moving to Macon, Georgia,
    that would be a very good idea.
        [Laughter.]
        Mr. Hummel. And while I was in Macon, what I would do is
    ask Congress to look at FIRREA and, importantly, two things I
    would ask them to look at is, one, the Appraisal Subcommittee
    does have certain influences. I talked about, you know,
    basically we have given them a tablet of paper and an atomic
    bomb, and that is all they have to enforce the rules with.
        They need something in between, and they need to be held
    accountable by Congress to making certain that the State boards
    are properly functioning. With $5 million in the kitty right
    now, it is possible that there might be some way that they can
    help with the enforcement--again, given proper oversight and
    then give them the authority to go in and the tools to make
    certain States are using their enforcement powers.
        Second, one thing that we could do, and the change would be
    repealing Section 1122 of FIRREA. Section 1122 is bizarrely
    called ``the Antidiscrimination Clause,'' and what it does is
    it discriminates against individuals of higher-level education
    and training, and states, you know, that they should not be the
    ones chosen to do the services. We need to recognize and
    encourage the use of designated appraisers with qualifications
    beyond the certified and licensed levels.
        Senator Allard. Senator Miller, we are going to have
    another round with the Committee. I would make it the last
    round, if that is all right with the Senators here.
        I have one question. I just want to follow up on the issue
    that Senator Sarbanes brought up and get your response to that.
        The Committee has heard a number of concerns with seller-
    assisted downpayment programs, in which the seller makes a
    contribution to a charitable organization, which then makes a
    gift to the purchaser for a downpayment and closing costs.
    Apparently, this is a problem in Maryland, which Senator
    Sarbanes represents. According to information I have received,
    many properties sold through these programs are financed for
    more than their market value.
        Mr. Clark, have you seen this problem in Georgia?
        Mr. Clark. Yes, sir. We have had two or three cases of that
    were brought to the attention of the board, and the board has
    disciplined the appraisers involved in those situations.
        Senator Allard. And you think you have the situation well
    under control in Georgia?
        Mr. Clark. In the sense that we could respond to it when we
    identify it, but I think that there is a bigger problem there,
    and that is the banking standards that would allow them to make
    loans when they recognize these gift situations occurring. I
    think there is some responsibility for the bank there, as
    opposed to necessarily the appraiser. We just happen to know of
    two or three cases in Georgia where the appraiser obviously
    inflated the value.
        Senator Allard. I see.
        Mr. Hummel and Mr. Kaczkowski, how can we ensure that
    appraisals are not inflated in such programs? Maybe you two
    could respond.
        Mr. Hummel. The situations I have seen that occur, quite
    honestly, we had individual appraisers that were incompetent.
    They did not understand the proper methodology to analyze that
    particular property and the financing inherent in it. And so
    one of the solutions, again, is to recognize that we should not
    be solely selecting the minimally qualified licensed and
    certified appraiser, but giving some type of endorsement and
    encouragement to making certain that the appraiser who is best
    qualified does that particular service.
        Senator Allard. You believe it is a matter of ignorance and
    not a matter of intentionally trying to be part of a program to
    defraud?
        Mr. Hummel. There are certain individuals out there,
    without question, that choose to commit fraud. There are others
    that, again, because of their incompetence, provide false
    appraisals.
        Senator Allard. So what can we do to ensure that it is not
    inflated?
        Mr. Hummel. Again, I would suggest the repealing of Section
    1122 of FIRREA because so many lenders have read that and said,
    ``What this says is that I should not look at the highest
    qualified. I am supposed to go to simply the certified or
    licensed individual, even if I know there are individuals out
    there with higher qualifications and education that would
    competently perform this assignment for me.'' My suggestion
    would be to repeal Section 1122 of FIRREA.
        Senator Allard. Mr. Kaczkowski, do you want to add
    anything?
        Mr. Kaczkowski. Yes, there is one issue, and that involves
    the de minimis rule.
        Senator Allard. Yes.
        Mr. Kaczkowski. That says that appraisals are required for
    a residential property over $250,000. So, if you want to cheat,
    I suppose you should cheat on those properties that are under
    $250,000.
        Senator Allard. Or less than $1 million on commercial
    property; is that----
        Mr. Kaczkowski. A million dollars on commercial, that is
    correct. So that is one way of doing it. Other than having
    competent and conscientious appraisers who are aware of the
    situation report these unethical and criminal acts, I do not
    know if there is any systematic way of doing it.
        Certainly, a competent appraiser who has access to selling
    data would know that there would be, let us say, unusual buying
    and selling activity. There are certain rules that require the
    appraiser to consider all sales that have been made of a
    property over a certain period of time. If that information is
    reported properly, competently, that is part of an appraiser's
    responsibility. If you choose not to accept that
    responsibility, and lie and cheat, the only way that you are
    going to be found out is if someone will report you. I do not
    know how you legislate that.
        Senator Allard. Would a credit score from the bank reflect
    that? Maybe in some instances.
        Mr. Kaczkowski. I do not, offhand, see how that would.
        Senator Allard. I mean, if you have one individual scoring,
    doing a lot of loans and whatnot, the credit score that is the
    only place I could think of where it might show up.
        Senator Reed.
        Senator Reed. I have no questions.
        Senator Allard. Senator Miller.
        Senator Miller. This is my last one, and I do not mean to
    start this hearing all over again, but let me ask this of each
    one of you, just go down the line and start with Mr. Wood all
    the way through.
        I know you could speak a long time on it, as you already
    have and with your testimony, but I would suggest you try to
    respond somewhere between the answer ``it would be a disaster
    or not anything.'' And my question is what would be wrong with
    the Federal Government allowing States to regulate appraisers
    in the same way they do other professions?
        You do not have to answer that the way I suggested, but in
    your own words. But what I was pointing out was somewhere in
    between those two extremes.
        Mr. Wood. The only experience that I can point to is, of
    course, pre-FIRREA, where it was clearly seen to be a mistake
    or a weakness. Whether that disaster would repeat itself, I do
    not know, but that is certainly what we are trying to avoid.
        Mr. Fritts. I would echo Mr. Woods' comments. My own
    personal experience, having closed many banks and thrifts, I
    can speak personally to the fact that the poor quality of the
    appraisal products pre-FIRREA clearly had a contributory factor
    in the result of all of those failures, not all of them, but
    many of them.
        Senator Miller. You just cannot trust those States?
        Mr. Fritts. Oh, I think we can trust those States. I think
    the States do a good job. Pre-FIRREA, most States did not
    regulate the appraisal industry.
        Senator Miller. Mr. Clark.
        Mr. Clark. I am generally in agreement with Mr. Fritts on
    this issue. I think the States can do it, and should do it, but
    I think there is a need for Title XI to say that banks are
    going to have to use a State-licensed or certified appraisal.
    That will force all States to see to it that they do it.
        Mr. Bunton. The States can do it, but it is the Federal
    oversight that is the glue that holds this all together.
        We do not have--Mr. Clark mentioned the medical community
    or the legal profession--we do not have a bar association or an
    AMA. Most appraisers, we pointed out, do not belong to an
    organization. And before FIRREA, only three States were
    licensing and certifying. I think that it would go in 55
    different directions.
        Mr. Hummel. From personal experience, I was at one time
    licensed in five different States. I chose not to be licensed
    in five different States because, even as an instructor of
    appraisal education, I was still required to sit five different
    times for the same course because I carried licenses in five
    different States.
        I believe that States can do good work within their
    boundaries, but we must have the Federal oversight to pull it
    all together, and, again, that Federal oversight being properly
    accountable and properly funded.
        Mr. Kaczkowski. I would not like the appraisal profession
    to be lumped in with the accounting profession because of
    recent events.
        [Laughter.]
        But we have seen fit to put together a Public Company
    Accounting Oversight Board, and it seems to me that, just by
    analogy, what we have going for us right now is a pretty good
    thing, that we do need some coordinating and oversight board
    for the appraisal profession.
        And the one other thing I cannot quite reconcile in my own
    mind right now is that Title XI relates to Federal interest. I
    am not clear how the States would protect the Federal interest
    without Title XI.
        Senator Miller. Do you agree with that, Mr. Clark?
        Mr. Clark. No, sir. I think it is very clear how Title XI
    can protect the Federal interest, but still allow the States to
    do the regulation. That is why I outlined the things that I
    think Title XI needs to remain in. It needs to have a clear
    statement that the States will do this regulation. It needs to
    have a clear statement that if you have a license in one State,
    you can appraise in any State. Those are things I think are
    very appropriate at the Federal level.
        But in terms of establishing the minimum requirements, in
    terms of regulating the persons involved, that should be a
    State function.
        Senator Miller. Does anyone else want to add anything to
    this discussion?
        [No response.]
        Thank you very much. I thank the panel very much.
        Senator Allard. Yes, thank you. I would like to thank all
    of you for taking time from your jobs to be here and discuss
    this important issue with the Subcommittee.
        At this time, I would ask unanimous consent to enter into
    the record a letter from Stewart Leach, who is the Program
    Administrator of the Colorado Board of Real Estate Appraisers.
        Senator Allard. The record will be held open for 10 days
    should any other Member wish to submit a statement or
    questions. I would ask that the witnesses promptly answer any
    questions that may be submitted.
        Again, I want to thank you all for coming, and this hearing
    is adjourned.
        [Whereupon, at 4:03 p.m., the hearing was adjourned.]
        [Prepared statements, response to written questions, and
    additional material supplied for the record follow:]
                      PREPARED STATEMENT OF DAVID G. WOOD
              Director, Financial Markets and Community Investment
                         U.S. General Accounting Office
                                 March 24, 2004
        Mr. Chairman and Members of the Subcommittee, I appreciate the
    opportunity to be here today to discuss our report on Federal oversight
    of the real estate appraisal industry.\1\ In response to concerns that
    faulty and fraudulent appraisals played a major role in the savings and
    loans crisis of the 1980's, Congress enacted Title XI of the Financial
    Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
    Among other things, Title XI requires that real estate appraisals used
    in connection with federally related transactions be performed in
    writing, in accordance with uniform professional standards, and by
    individuals whose competency has been demonstrated and whose
    professional conduct is subject to effective supervision.\2\
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        \1\ U.S. General Accounting Office, Regulatory Programs:
    Opportunities to Enhance Oversight of the Real Estate Appraisal
    Industry, GAO-03-404 (Washington, DC: May 14, 2003).
        \2\ 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.
    ---------------------------------------------------------------------------
        My statement today, which is based on our May 2003 report,
    discusses (1) the specific responsibilities of the entities that
    comprise the Title XI oversight structure, (2) factors which these
    entities identified as potential impediments to carrying out their
    Title XI responsibilities; and (3) concerns expressed by the entities
    and industry participants about the effectiveness of the existing
    regulatory structure. In preparing our report, we reviewed FIRREA and
    its legislative history; interviewed officials from the entities
    involved in the Title XI regulatory structure; and surveyed appraiser
    regulatory agencies in the 50 States, the District of Columbia, and
    U.S. territories.\3\ Additionally, we met with officials and
    representatives of Fannie Mae and Freddie Mac, Government Sponsored
    Enterprises (GSE's) that establish standards for appraisals associated
    with mortgages they purchase; the Department of Housing and Urban
    Development (HUD), which establishes appraisal requirements for its
    insured mortgages; trade groups representing appraisers and mortgage
    lenders; appraiser education providers; and academic experts.
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        \3\ 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--did not have a regulatory oversight
    structure for appraisers. We received responses from all but one survey
    recipient (U.S. Virgin Islands). In this testimony, the term ``States
    and territories'' refers to the 50 States, the District of Columbia,
    Guam, the Northern Mariana Islands, and Puerto Rico.
    ---------------------------------------------------------------------------
        In summary, we found the following:

     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.
     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.
     States establish the minimum qualification criteria for
        licensed real estate appraisers. In addition, States (1) implement
        the certification and licensing of all real estate appraisers and
        (2) monitor and supervise compliance with appraisal standards and
        requirements. The States and territories have established
        structures typically consisting 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 Board of Governors of 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)--hereinafter
        referred to as ``the Federal financial institution regulators''--
        are responsible for ensuring that real estate appraisals used by
        federally insured depository institutions comply with Title XI. 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, which was created by Title XI, 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
        certification program, monitors and reviews the Appraisal
        Foundation, and provides grants to the Foundation to support the
        Title XI-related activities of its two boards--Appraisal Standards
        Board and Appraiser Qualifications Board.

        Entities involved in the Title XI regulatory structure described a
    number of factors that they believe 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 the
    States' regulatory responsibilities, 37 cited a need for increasing the
    staff directed at investigations, and 22 cited a need for more
    resources to support litigation. The five Federal financial institution
    regulators reported no major impediments to carrying out their Title XI
    responsibilities. The Appraisal Subcommittee reported that rulemaking
    authority and additional authority to ensure State compliance with
    Title XI could facilitate its monitoring of State compliance with Title
    XI. Subcommittee officials stated that the only mechanism available
    under Title XI for effecting State compliance 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 and have a devastating effect on the real estate markets
    and financial institutions within that State. However, the Appraisal
    Subcommittee stated that it has always been able to achieve States'
    compliance under the current enforcement and regulatory structure.
        Officials of the regulatory agencies, appraiser trade groups,
    education providers, the mortgage industry, HUD, and the GSE's voiced
    concerns about Title XI's regulatory structure. However, we noted no
    clear consensus on 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
    falling below a dollar threshold set 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 criteria for the
    licensed real estate appraiser category. Education providers and
    appraiser 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.
        We made four recommendations to the Appraisal Subcommittee intended
    to enhance the effectiveness of the existing regulatory structure. As
    of March 17, 2004, the Appraisal Subcommittee reported that it has
    taken action on three of the recommendations: to (1) develop and apply
    consistent criteria for determining and reporting States' compliance
    with Title XI; (2) explore options, including drawing on its surplus,
    for addressing Appraisal Foundation grant shortfalls; and (3) provide
    nonfinancial assistance to aid the States in carrying out their Title
    XI responsibilities. The Appraisal Subcommittee reported that it
    attempted but has not been successful regarding our fourth
    recommendation, which was to coordinate with Fannie Mae, Freddie Mac,
    and HUD to improve the process of referring problem appraisals to State
    appraiser agencies for enforcement.
    Background
        An appraisal is an opinion of the value of a property as of a
    specific date. Appraisers generally consider a 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
    comparable sales approach, which compares and contrasts the property
    under appraisal with recent offerings and sales of similar property, is
    usually considered most appropriate for estimating the value of
    residential real estate.
        The primary role of appraisals in the mortgage loan underwriting
    process is to provide evidence that the collateral value of property is
    sufficient to avoid losses on loans if the borrower is 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 purpose of the appraisal reforms contained in Title XI
    was to assist in protecting the Federal deposit insurance funds--and,
    by extension, mortgage lenders--from avoidable losses. Officials of the
    Federal financial institution regulators noted that faulty and
    fraudulent real estate appraisals have been associated with losses
    incurred by federally insured financial institutions 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.
    Title XI Created a Complex Oversight Structure
        Private, State, and Federal entities have responsibilities under
    the Title XI regulatory structure. Private entities--the Appraisal
    Standards Board (ASB) and the
    Appraiser Qualifications Board (AQB)--establish minimum standards for
    the development and reporting of real estate appraisals and minimum
    qualification criteria for certified appraisers. States are responsible
    for certifying appraisers, using education and experience requirements
    that, at minimum, meet AQB criteria, and for enforcing compliance with
    appraisal standards. States may also license appraisers using State-
    established licensing criteria. (For those States that had both,
    experience and education requirements for certified real estate
    appraisers exceeded those for licensed real estate appraisers.) The
    Federal financial institution regulators establish appraisal
    requirements for the insured depository institutions under their
    jurisdiction and 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.
    Appraisal Foundation's Boards Establish Appraisal Standards and Minimum
    Appraiser Certification Criteria
        The Appraisal Foundation, a nonprofit educational organization
    composed of groups from the real estate industry, provides the
    organizational framework for the ASB and AQB to carry out their Title
    XI-related responsibilities.\4\ The ASB is responsible for setting
    standards for appraisals, which are contained in its Uniform Standards
    of Professional Appraisal Practice (USPAP). Under Title XI, these
    minimum standards apply to all federally related transactions for which
    an appraisal is required. The standards cover both the steps appraisers
    must take in developing appraisals and the information the appraisal
    report must contain.
    ---------------------------------------------------------------------------
        \4\ 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.
    ---------------------------------------------------------------------------
        The AQB establishes the minimum education, experience, and
    examination requirements for real estate appraisers that are set out in
    Real Property Appraiser Qualification Criteria and Interpretations of
    the Criteria. 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.
        The ASB and the AQB regularly evaluate USPAP and the appraiser
    qualification criteria to determine whether revisions are needed.
    According 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.
    State Agencies Oversee the Licensing and Certification of Real Estate
            Appraisers
        Under Title XI, States may establish agencies to certify and
    license appraisers. At the time of our survey, all 50 States, the
    District of Columbia, and 4 of the U.S. territories had established
    such agencies, which typically oversee the activities of appraisers for
    all types of transactions, including those that are federally related.
    All of the States and territories had established programs for
    certifying appraisers, and nearly 70 percent reported that they had
    introduced qualifications in addition to those established by the AQB.
        At the time of our review, 6 States did not provide for licensed
    appraisers, according to the Appraisal Subcommittee. Those that did and
    responded to our survey reported a variety of licensing requirements.
    For example, some States did not require licenses unless appraisers
    planned to work with federally related transactions, while other States
    required appraisers to be either licensed or certified to perform real
    estate appraisals, even for transactions that are not federally
    related. The States' programs typically included temporary and
    reciprocal licensing provisions, though as discussed below, the
    provisions varied. (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.)
        In addition to conducting certification and licensing activities,
    States with certifying and licensing agencies are required under Title
    XI 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. All of our survey respondents reported 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.
        Although the States are responsible for the certification and
    licensing of appraisers, the Appraisal Subcommittee has a role in
    ensuring that State qualifications satisfy Title XI objectives. Under
    Title XI, the Federal financial institution regulatory agencies are to
    accept a State's certifications and licenses unless the Appraisal
    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; does not have enough
    authority to carry out its functions under Title XI; or does not make
    decisions on appraisal standards and qualifications or supervise
    appraiser practices in a way that carries out the purposes of Title XI.
    Federal Regulators Determine Which Transactions Require Appraisals and
    Establish Compliance Standards for Depository Institutions
        Title XI requires that the Federal financial institution regulators
    prescribe the categories of federally related transactions that should
    utilize a State-certified appraiser and those that should utilize a
    State-licensed appraiser. The statute provides that certified
    appraisers must be used for federally related transactions having a
    value of $1,000,000 or more. The Federal financial institution
    regulators generally require the use of certified appraisers for
    commercial transactions of $250,000 or more and ``complex'' residential
    transactions of $250,000 or more. The regulators are responsible for
    determining whether other types of transactions warrant the use of a
    certified appraiser. All other federally related transactions, unless
    subject to an exemption as authorized under Title XI, may utilize a
    State-licensed appraiser.\5\
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        \5\ Although the States are responsible for establishing and
    administering licensing qualifications, Title XI authorizes the Federal
    financial institution regulators to establish additional qualification
    criteria.
    ---------------------------------------------------------------------------
        Also, under Title XI the Federal financial institution regulators
    may establish a threshold transaction amount at or below which neither
    a certified or licensed appraiser is required. As of March 15, 2004,
    each of the five regulatory agencies had regulations in place setting
    this threshold at $250,000. Thus, for federally related mortgage loan
    transactions of $250,000 or less, financial institutions have the
    option of obtaining either an appraisal or some other form of an
    evaluation of the property's value.\6\ 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.
    ---------------------------------------------------------------------------
        \6\ 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, DC:
    May 23, 1994). In addition, the Federal financial institution
    regulators issued Interagency Appraisal and Evaluation Guidelines on
    October 27, 1994.
    ---------------------------------------------------------------------------
        Title XI also requires the Federal financial institution regulators
    to ensure that real estate appraisals used in connection with federally
    related transactions are performed in accordance with standards
    developed by the ASB. The regulators require that all appraisals for
    federally related transactions (1) conform, at a minimum, to USPAP, (2)
    be written, and (3) contain sufficient information and analysis to
    support the institution's decision to engage in the transaction.
        The Federal financial institution regulators may take informal and
    formal enforcement actions, including memorandums of understanding,
    removal, prohibition, and cease and desist orders and the imposition of
    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 Act of 1991, the Federal financial institutions regulators
    can take action against institution-affiliated parties such as
    appraisers.
    Appraisal Subcommittee Monitors Title XI Regulatory Activities
        Title XI created the Appraisal Subcommittee within the Federal
    Financial Institutions Examination Council and established it as the
    principal Federal agency responsible for monitoring the activities of
    the other components of the real estate
    appraisal industry oversight structure.\7\ The Subcommittee has six
    board members--designated by the five financial institution regulatory
    agencies that make up the Federal Financial Institutions Examination
    Council, and HUD--and seven staff members. The Subcommittee funds its
    activities through a portion of the fees assessed by the States against
    individual appraisers for licensing and certification.\8\
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        \7\ The Federal Financial Institutions Examination Council is a
    formal interagency body empowered to prescribe uniform principles,
    standards, and report forms for the examination of financial
    institutions by the FRS, FDIC, OCC, OTS, and NCUA.
        \8\ 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 15, 2004, the annual registry fee was $25.
    ---------------------------------------------------------------------------
        Among other things, the 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. 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 the requested funds will only
        be used for activities related to Title XI.
     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. Accordingly, the Subcommittee performs on-site field
        reviews of State agency programs and maintains communications with
        appraisers, State and Federal agencies, and users of appraisal
        services. 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.\9\ The Subcommittee issues
        the States letters at the conclusion of the reviews, identifying
        concerns, discussing whether the previous review's concerns have
        been resolved, and making general conclusions about the State's
        compliance with Title XI and Appraisal Subcommittee policy
        statements.

        \9\ 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 experience a loss.
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            Our analysis of the Appraisal Subcommittee's State field review
            letters from 1992 to 2002 found that the letters provided some
            information to the State regulatory agencies but lacked
            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.
            Further, when the letters contained determinations of
            compliance, the rationale for the decisions was not always
            given. For example, some States with identified concerns were
            deemed compliant, while others with identified concerns were
            deemed noncompliant. Accordingly, we recommended that the
            Subcommittee develop and apply consistent criteria to assess
            States' compliance with Title XI requirements.

     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. The Subcommittee carries out this
        responsibility 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.
     Maintaining a national registry of State-licensed and State-
        certified appraisers who may perform appraisals in connection with
        federally related transactions.
    Entities Cited Potential Impediments to Fulfilling Their Title XI Roles
        The private, State, and Federal entities involved in the oversight
    of the real estate appraisal industry identified a number of factors
    that they believe could constrain their ability to fulfill their Title
    XI responsibilities. ASB and 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 appraisal standards and
    qualification criteria keep pace with changes in the 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 noted that reaching consensus on regulatory
    standards was difficult because of the number of entities involved in
    the appraisal industry. Appraisal Subcommittee officials reported that
    rulemaking authority and additional enforcement sanctions could
    facilitate the Subcommittee's oversight of State compliance.
    The Appraisal Standards and Appraiser Qualifications Board Cited
    Concerns about Federal Funding
        ASB and AQB officials told us that expected 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 funding is needed to update their
    ``body of knowledge,'' which outlines the concepts, theories, and
    applications of the real property appraisal profession and delineates
    the skill necessary to practice. 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.
        Since 1991, the Appraisal Subcommittee has allocated the Appraisal
    Foundation a total of over $9 million in grants to defray the costs of
    the two boards' Title XI-related activities. These grant allocations
    typically have been less than the amounts requested. For example, the
    ASB and AQB requested a total of over $9 million in grant money between
    1994 and 2003, but less than $7 million was approved. However, the
    Appraisal Foundation has sources of revenue other than the Appraisal
    Subcommittee grants. For example, the largest source of revenue for the
    Appraisal Foundation in 2001 was $1.1 million from publication sales;
    in comparison, the $870,373 grant from the Appraisal Subcommittee
    represented approximately 36 percent of the Foundation's total revenue.
    Also, Subcommittee officials noted that the ASB and AQB had not used
    the entire amounts of grant funds provided in past years.
    States Cited Funding Limitations and Frequent USPAP Updates as
            Impediments
        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 Subcommittee had a $3.9 million
    surplus as of December 2003. Subcommittee officials reported that the
    surplus built up in its early years when revenues exceeded its expenses
    and grants. They added that as its expenses have increased--primarily
    due to inflation and monitoring activity expenses--the amount of funds
    available for grants to the ASB and AQB from current-year funds has
    become limited. They further explained that it has not been Appraisal
    Subcommittee policy to use the surplus to provide grants to the ASB and
    AQB.
        Appraisal Subcommittee officials also stated that they expect the
    boards' expenses to increase 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 consequence, future ASB and AQB grants 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.
    Accordingly, we recommended that the Appraisal Subcommittee explore
    potential options 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.
        In responding to our survey, most of the States identified funding
    and staffing deficiencies as the most serious challenges they faced in
    carrying out their Title XI duties. According to Appraisal Subcommittee
    officials, the Subcommittee's 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.
        Based on survey data, 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. One State official
    explained that without adequate funding States could not effectively
    administer their appraiser certification programs or investigate and
    dispose of disciplinary cases in a timely manner. Another State
    official noted that his agency knew that more enforcement and faster
    turnaround times in investigating complaints were needed but that
    limited resources hindered it. We recommended that the Appraisal
    Subcommittee explore potential options for funding or otherwise
    assisting the States in carrying out their Title XI activities,
    particularly the investigation of complaints against appraisers.
        Seventy percent of the State appraiser regulatory agencies
    indicated that USPAP updates were too frequent. One State reported that
    frequent changes to USPAP have made processing complaints difficult
    because staff members have to determine what appraisal standards were
    in place at the time of the questionable appraisal. 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 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 with newsletters
    that highlight any changes, modifications, or clarifications to USPAP
    or appraiser qualification criteria.
    Appraisal Subcommittee Stated That Rulemaking Authority and Enforcement
    Options Could Facilitate Its Oversight of States
        According to Subcommittee officials, the lack of rulemaking
    authority and limited enforcement powers make achieving the uniformity
    and standardization intended by Title XI more difficult. In addition,
    the officials noted that because the 55 State appraiser regulatory
    agencies took a variety of approaches to implementing Title XI,
    expanding the Subcommittee's role 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 rulemaking authority would also
    change the Subcommittee's role under Title XI from a monitoring to a
    regulatory function.
        Subcommittee officials stated that currently the only means for
    ensuring State compliance with Title XI is to decertify a State.
    Decertification would prohibit 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.)
        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 our 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 Raised Various Concerns about the Title XI
    Oversight Structure
        Representatives of Federal and State regulatory agencies, appraiser
    trade groups and education providers, and the mortgage industry
    expressed various concerns and conflicting viewpoints about the Title
    XI regulatory structure. However, there was no clear consensus
    regarding the need for or impact of possible changes.
    Differences Among State Licensing Programs
        According to many of the groups we 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. 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. But
    Title XI specifically provides that the Appraisal Subcommittee will not
    set requirements for licensing and that any Subcommittee
    recommendations are nonbinding. 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.
        At the time of our review, officials from the Appraisal
    Subcommittee reported that most States have adopted provisions
    requiring that licensed appraisers meet AQB recommended criteria.
    However, six States did not have a State-licensed appraiser category,
    and six had licensing requirements that were 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.
        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 in order to perform federally related transactions. As of
    March 2003, 10 States were classified as being in the voluntary
    licensing category. Some 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. One Federal financial
    institution regulator reported that most of the mortgage fraud problems
    it has encountered have occurred in States where licensing is
    voluntary. An earlier Federal Bureau of Investigation testimony at a
    special Congressional hearing on predatory lending in March 2000 echoed
    this view. According to that testimony, the most egregious property
    flipping problems have occurred in States where licensing is voluntary
    for transactions that are not federally related.
        Industry participants also cited a lack of uniformity in the way
    States grant temporary and reciprocal licenses. Because a State may not
    recognize the credentials from another State, appraisers often have to
    carry multiple State licenses. 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
    inconsistent with the Appraisal Subcommittee's guidance recommending
    that States accept licenses or certification from other States meeting
    AQB requirements.
    Transactions Not Covered by Title XI
        Industry participants also voiced concerns about the fact that
    Title XI does not cover all financial institutions and that mortgage
    brokers are not subject to Federal regulation. When Title XI was
    enacted, federally regulated lending institutions (banks, thrifts, and
    credit unions) made most mortgage loans. Today, other financial
    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 example, examinations or audits.\10\ 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.
    ---------------------------------------------------------------------------
        \10\ 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.
    ---------------------------------------------------------------------------
        Some industry participants have said that the $250,000 real estate
    appraisal threshold established by the Federal financial institution
    regulators undercuts 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.
    Costs and Lack of Uniform Approval Processes for Appraiser Education
            Courses
        Several State regulators and education providers expressed concerns
    about the expenses and lack of uniformity in the processes associated
    with approving instructors and courses for appraisers' continuing
    education. A representative of an appraisers' trade group noted that
    gaining approval for a course and an instructor in one State does not
    necessarily translate into approval in other States. As a result, the
    trade group spent around $30,000 having courses for a July 2000
    training conference approved in all jurisdictions. Some appraisal
    industry 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. 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. 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.
        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 also
    requested a legal opinion from the Legal Advisory Group of the Federal
    Financial Institutions Examination Council on the scope of AQB's
    authority to adopt education-related standards for certified
    appraisers; the scope of the Appraisal Subcommittee's responsibility in
    monitoring the AQB; and the Appraisal Subcommittee's authority to
    oversee State regulators' implementation of AQB standards.\11\ 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.
    ---------------------------------------------------------------------------
        \11\ The Legal Advisory Group consists of the general or chief
    counsels of the FDIC, FRS, OCC, OTS, and NCUA.
    ---------------------------------------------------------------------------
    Variations in State Regulatory Agencies' Enforcement of Title XI
            Requirements
        Some industry participants reported a lack of uniformity in
    processing complaints and taking disciplinary actions against those
    problem appraisers that were referred to State regulatory authorities.
    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, while two other States accounted for over 25 percent of the
    4,360 disciplinary actions reported as of October 31, 2002.
        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 others accept complaints only on a specific form, or require that
    complaint documents be notarized or that complainants provide witnesses
    and testify against appraisers. Other concerns included:

     The length of time needed to resolve complaints. For example,
        one State required 1 to 2 years, potentially allowing the appraiser
        to continue what might be fraudulent or questionable practices.
     Statutes of limitations that pose an 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.

        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. As an example, they
    noted that some States appeared to perform meaningful investigations
    and took appropriate actions while others appeared unwilling to
    investigate similar cases with comparable support and documentation.
    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. 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. 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 recommended that the Appraisal Subcommittee
    work with Fannie Mae, Freddie Mac, and HUD to ensure that the referral
    of problem appraisals (1) are provided in a format that is useful to
    the State appraiser agencies and (2) facilitate the Subcommittee's
    efforts to monitor decisions made by the States regarding the
    supervision of appraiser practices.
    No Clear Consensus Regarding the Need for Changes to the Title XI
    Regulatory Structure
        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 impacts of eliminating some of the central aspects
    of the Title XI regulatory structure. 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 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 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. He also suggested that Congress
    clearly designate the States as having sole responsibility for
    administering and enforcing Title XI.
        However, our survey of the State appraisal agencies showed a wide
    variety of views. For example, 22 States and territories (41 percent)
    said that eliminating the Appraisal Subcommittee would enhance their
    ability to regulate 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. Similarly, 31 and 23 States, respectively, indicated that
    eliminating the ASB and AQB would hinder their efforts to regulate
    appraisers, while 10 and 21 States, respectively, indicated that
    eliminating the ASB and AQB would be helpful.
        In conclusion, 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.
        Mr. Chairman, this concludes my prepared statement. I would be
    happy to answer any questions at this time.
                                   ----------
                     PREPARED STATEMENT OF STEVEN D. FRITTS
                        Chairman, Appraisal Subcommittee
               Federal Financial Institution Examination Council
            Associate Director, Risk Management/Examination Support,
                Division of Supervision and Consumer Protection,
                     Federal Deposit Insurance Corporation
                                 March 24, 2004
    Introduction and Background
        Good afternoon, Chairman Allard and Members of the Subcommittee.
    Thank you for the opportunity to discuss the current state of the
    appraisal industry and its Federal and State oversight. On behalf of
    the Appraisal Subcommittee (ASC), I commend your Subcommittee's
    initiative to understand the current state of the industry and assess
    the current regulatory structure and its ability to ensure that Federal
    financial and public policy interests in real estate related financial
    transactions are protected, consistent with Title XI of the Financial
    Institutions Reform, Recovery, and Enforcement Act of 1989, as amended
    (Title XI).
        I am the Chairman of the Appraisal Subcommittee. The Chairmanship
    of the Appraisal Subcommittee, which was created on August 9, 1989,
    pursuant to Title XI, rotates bi-annually among the Subcommittee
    membership. I also serve as Associate Director at the FDIC, where my
    responsibilities involve safety and soundness of bank examination
    policy.
        In general, the ASC oversees the real estate appraisal process as
    it relates to Federally related transactions--any real estate related
    financial transaction entered into on or after August 9, 1990, that a
    Federal banking agency or any regulated depository institution engages
    in or contracts for, and requires the services of an
    appraiser. The ASC membership includes representatives from each of the
    five members of the Federal Financial Institutions Examination Council,
    and from the Department of Housing and Urban Development.
        Following the financial crisis of the 1980's, Congress passed the
    Financial Institutions Reform, Recovery, and Enforcement Act of 1989
    (FIRREA). Title XI of FIRREA addressed the identified weaknesses
    regarding real property appraisals used in connection with federally
    related transactions. Prior to FIRREA, appraisals for federally related
    transactions and the appraisers who performed them, were, for the most
    part, unregulated at either the Federal or State level. In most States,
    the only legal requirement to become an appraiser was that the
    individual obtain a business license from the county or other local
    jurisdiction. During the financial crisis of the 1980's, poor quality
    appraisals were a contributing factor to the numerous bank and savings
    and loan failures. Title XI sought to address this situation.
        Title XI created a unique system. As noted in the General
    Accounting Office (GAO) May 2003 report titled, Opportunities to
    Enhance Oversight of the Real Estate Appraisal Industry, Title XI
    created a complex oversight structure for real estate appraisals and
    appraisers that involves private, State, and Federal entities. Two
    private entities within the Appraisal Foundation establish uniform
    rules for real estate appraisals (that is, the Uniform Standards of
    Professional Appraisal Practice (USPAP)) and set minimum criteria for
    certifying appraisers (that is, The Real Property Appraiser
    Qualification Criteria). The Appraisal Standards Board and the
    Appraiser Qualifications Board, respectively, establish these rules and
    criteria. State regulatory agencies (that is, 50 States, the District
    of Columbia, and five territories) certify appraisers based on these
    criteria. The Federal financial regulatory agencies (Agencies) oversee
    financial institutions' use of appraisals.
    Responsibilities of the Appraisal Subcommittee
        Title XI sets out the ASC's general responsibilities:

     Monitor the requirements established by the States,
        territories, and the District of Columbia and their appraiser
        regulatory agencies (State agencies) for the certification and
        licensing of appraisers. The ASC reviews each State's compliance
        with the requirements of Title XI and is authorized by Title XI to
        take action against noncomplying States;
     Monitor the requirements established by the agencies 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;
     Maintain a national registry of State-licensed and certified
        appraisers who may perform appraisals in connection with federally
        related transactions;
     Monitor and review the practices, procedures, activities, and
        organizational structure of the Appraisal Foundation; and
     Transmit an annual report to Congress regarding the activities
        of the ASC during the preceding year.

        The ASC is funded by a $25 per year fee for an appraiser to be
    listed on the National Registry of State-Certified and Licensed
    Appraisers (Registry). States collect these fees as part of their
    licensing, certification, and renewal activities and remit the registry
    fees to the ASC. Although the ASC has the authority to increase the fee
    up to $50, we have maintained the registry fee at the same $25 that was
    established in 1989. The annual operating budget of the ASC is $2.1
    million. Through automation and contracting out, the ASC has reduced
    staffing from nine employees to 7 over the last 15 years and has
    attempted to maintain a high level of operating efficiency.
    Status of State Compliance with Title XI
        Generally, States do a good overall job of enforcing compliance
    with Title XI, given the resource limitations facing most States.
    Although some States have areas that need improvement, we have found
    most States generally compliant with Title XI.
        Our primary tool for evaluating State compliance with Title XI is a
    3-year on-site review cycle. Given Title XI's 56 jurisdictions, ASC
    staff performs on-site reviews of approximately 18 States per year,
    plus conducting several follow-up reviews. Once we have completed the
    field review and formally transmitted our findings to the State, we
    work with the State to ensure correction of noted areas of concern.
    Most States address our concerns in a timely manner. Currently, the
    most problematic area involves complaint investigation and resolution.
    Because this area requires specialized personnel and expertise, it is
    one of the more complex and costly functions for State appraiser
    regulatory agencies. Consequently, some States are not as timely in
    their complaint investigation and resolution efforts as they should be.
    Each year, we provide a summary of significant areas of concern
    identified during our field reviews in our annual report to Congress.
    National Registry of State-Certified and Licensed Appraisers
        One of the ASC's primary responsibilities is maintenance of the
    registry. During the past several years, the ASC has made the registry
    available via the Internet to States and the public. We added sections
    reserved for State-only access to facilitate State efforts in areas
    such as researching the license history of appraisers and determining
    whether an appraiser is in ``good standing'' in another State. We have
    added automated e-mail notification to States, lenders, and other
    parties when appraiser credentials are revoked or suspended and when
    they expire. We continue to evaluate the registry to add features that
    improve its value to the States, lenders, and the general public.
    Appraisal Foundation
        The ASC monitors the activities of the Appraisal Foundation and its
    Appraiser Qualifications Board and Appraisal Standards Board to ensure
    that their actions are reasonable, not arbitrary or capricious, and
    otherwise consistent with law. As authorized by Title XI, the ASC also
    provides funding, via annual grants, to the Foundation and its boards
    to support their Title XI-related activities.
    Challenges Ahead for the Appraiser Industry
        In many cases, it is difficult for appraisers licensed or certified
    in one State to appraise properties in other States. Title XI requires
    that States issue temporary practice permits to appraisers on a single
    assignment basis, but imposes this requirement only for federally
    related transactions. Also, the appraiser must apply each time he or
    she wishes to perform an assignment in that State. Often, delays in
    completing the temporary practice approval process conflict with the
    timing needs of the parties involved in the real estate transactions.
        While Title XI requires States to offer temporary practice for
    federally related transactions, it only encourages States to offer
    license and certification credentials via reciprocity agreements with
    other States. To enter into such agreements, some States require formal
    written agreements with other States, while other States' laws prohibit
    them from entering into such formal agreements. Some States have
    developed methods of informally offering reciprocity to appraisers.
    Nonetheless, impediments to interstate movement of appraisers are a
    concern repeatedly expressed to us by lenders and appraisers with
    regional or national operations.
        With 56 Title XI jurisdictions issuing implementing statutes and
    regulations, there is a considerable amount of conflict and overlap
    among the States. For example, appraisers who hold appraiser
    credentials in multiple States might have to take the same continuing
    education course multiple times to meet the continuing education
    requirements of various States. Additionally, a continuing education
    course that is acceptable to one State might not be acceptable to
    another.
        Another issue, which was raised in the GAO report, is the
    applicability of Title XI to residential mortgage transactions handled
    by mortgage brokers. These entities were not captured by Title XI as
    most mortgage brokers are not regulated at the Federal or State level.
    The ASC raises this issue as we have received a number of comments on
    appraisal abuse by mortgage brokers. Many estimates indicate that
    mortgage brokers originate as much as 50 percent of all residential
    mortgage loans.
        Other issues that the industry and regulators are grappling with
    include the appropriateness of automated evaluation methodologies and
    the rapidly increasing market values of residential properties in some
    markets.
    Conclusion
        Some contend that the need for Federal law and Federal oversight of
    the appraiser regulatory system no longer exists. Given the
    difficulties we have experienced in achieving some level of consistency
    among States to better facilitate interstate lending and appraising
    activities, we believe that a lack of Federal law and oversight would
    allow the system to become increasingly fragmented to the overall
    detriment of the appraisal industry.
        Considering the complexity inherent in the appraiser regulatory
    structure and the weaknesses discussed above, the system functions
    reasonably well. At 15 years, the appraiser regulatory system is
    relatively young. We expect continued adjustments and challenges as the
    system matures.
        This concludes my testimony. I will be happy to answer any
    questions the Subcommittee might have.
                                   ----------
                     PREPARED STATEMENT OF DAVID S. BUNTON
               Executive Vice President, The Appraisal Foundation
                                 March 24, 2004
    Introduction
        Mr. Chairman, The Appraisal Foundation appreciates the opportunity
    to appear before the Subcommittee on Housing and Transportation of the
    Senate Committee on Banking, Housing, and Urban Affairs and offer its
    perspective on Title XI of the Financial Institutions Reform, Recovery,
    and Enforcement Act (FIRREA), 15 years after enactment.
    Background
        My name is David Bunton and I serve as the Executive Vice President
    of The Appraisal Foundation. Our organization plays a somewhat unique
    role in that it serves as the private sector resource to appraiser
    regulators. We are not a membership-based trade association, but rather
    a not-for-profit educational organization that serves as an umbrella
    group for organizations with an interest in valuation. We refer to
    these groups as Sponsoring Organizations, a listing of which is
    attached to this testimony as Attachment #1.
        The appraisal profession in the United States has traditionally
    been somewhat fragmented. In the interest of promoting consistency and
    uniformity in the areas of professional standards and qualifications,
    eight national appraisal organizations created The Appraisal Foundation
    in 1987. Our mission is to promote professionalism in appraising by
    setting qualifications that one must meet to become an appraiser and
    establishing performance standards for how an appraisal should be
    performed.
    Our Congressionally Authorized Responsibilities
        In 1989, through the enactment of Title XI of FIRREA, the Congress
    gave The Appraisal Foundation specific responsibilities relating to the
    regulation of appraisers. All appraisals performed for federally
    related transactions must be in conformance with generally accepted
    appraisal standards, which are known as the Uniform Standards of
    Professional Appraisal Practice (USPAP) and are promulgated by the
    Appraisal Standards Board of The Appraisal Foundation. It is these
    standards which are used by the State appraiser regulatory agencies for
    disciplinary purposes.
        In addition, Title XI mandates that State-certified real estate
    appraisers must meet the minimum qualifications established by the
    Appraiser Qualifications Board of The Appraisal Foundation. These
    qualifications include education, experience, and continuing education
    requirements.
        Finally, in order to become a State-certified real estate
    appraiser, an individual must achieve a passing grade on a State
    certification examination that has been reviewed and approved by the
    Appraiser Qualifications Board.
    A Unique System for a Unique Task
        There is no question that Title XI established a rather unique
    relationship between Federal regulators, State regulators, and the
    private sector. However, given the unique task at hand, it is working
    quite well.
        The Appraisal Foundation establishes the minimum qualification and
    performance thresholds that ensure a base level of competency. The 55
    States and territories regulating appraisers then use these thresholds
    and, if they so choose can raise them to facilitate the specific needs
    of their jurisdiction. The Federal oversight entity, the Appraisal
    Subcommittee, ensures each of the 55 jurisdictions is operating in a
    manner that is consistent with Congressional intent. The Appraisal
    Subcommittee also monitors the activities of The Appraisal Foundation
    to ensure that it is fulfilling its Title XI responsibilities. This
    hybrid system (a) ensures that minimum levels of competency are met,
    (b) provides administrative latitude to each of the States, and (c)
    ensures overall accountability.
        In addition, this regulatory system does not operate with annual
    Congressional appropriations. Rather it is funded by appraisers through
    an annual ``registry fee,'' currently $25.00, which is paid to the
    Appraisal Subcommittee. This fee offsets the operating expenses of the
    Appraisal Subcommittee, as well as a significant portion of the
    expenses of the Appraisal Standards Board and the Appraiser
    Qualifications Board.
        One of the ancillary benefits of this system is that over the past
    decade a very productive working relationship has developed between the
    three entities. Foundation representatives participate in all State
    regulator conferences and we have conducted training sessions
    specifically for State appraiser investigators. We also have frequent
    meetings with Appraisal Subcommittee representatives. From our
    perspective, the input we have received from the States and the
    Appraisal Subcommittee has been invaluable in ensuring that the work of
    our Boards continues to meet the needs of the regulatory community and
    the marketplace.
    What Has Been Accomplished
        Over the past 15 years, The Appraisal Foundation has taken its
    Congressionally authorized responsibilities very seriously. As I
    previously indicated, our work has focused on two areas: Appraiser
    qualifications and standards of professional practice.
    Appraiser Qualifications
        During the implementation period of Title XI, the lending community
    expressed strong concerns that, if the qualifications for appraisers
    were set too high, there would be a subsequent shortage of appraisers
    which would impede lending. This concern was coupled with the fact that
    there was very little, if any, demographic information available about
    appraisers.
        With this in mind, the Appraiser Qualifications Board initially set
    relatively modest thresholds for education, experience, and examination
    requirements to become a State-certified real estate appraiser. The
    philosophy of the Board then, as it is now, was to periodically
    increase the qualifications over time to ensure continued appraiser
    competency and reflect changes in technology and the needs of the
    marketplace. Subsequent increases in appraiser qualifications became
    effective in 1998 and 2003, with another increase scheduled for
    implementation in 2008.
        For some time, Federal and State regulators had shared their
    concerns with The Appraisal Foundation about deficiencies in USPAP
    education (the quality of the course materials as well as the
    competency of the instructors). Very few would argue that sound
    education is an essential component of understanding USPAP due to the
    complexities of the document and its evolving nature.
        In response to this problem, in 2000 the Appraiser Qualifications
    Board (AQB) adopted new criteria intended to improve the overall
    quality of USPAP education. The changes, which became effective on
    January 1, 2003, include:

     Consistent Course Content: USPAP courses taken for qualifying
        and continuing education must be the National USPAP Courses or
        their equivalent. For 2004, 11 courses developed by educational
        providers have been deemed to be equivalent to the National USPAP
        Courses.
     Instructor Competency: In order for an appraiser to receive
        State credit for attending a USPAP course, it must have been taught
        by an AQB Certified USPAP Instructor and State-certified appraiser.
        In order to become an AQB Certified USPAP Instructor, an individual
        must attend a 2-day course and receive a passing grade on a
        comprehensive examination. As of this date, 462 individuals have
        become AQB Certified USPAP Instructors.
     Increased USPAP Continuing Education Requirement: Continuing
        education requirements for real property appraisers were modified
        to require 7 hours of USPAP instruction every 2 years. There was
        previously no specific requirement for USPAP continuing education.

        The Appraiser Qualifications Board is also responsible for the
    content of the examinations used by the States to certify appraisers.
    With the assistance of an outside psychometric consultant, the Board
    has developed and updated examination content outlines for use in the
    review and approval of State examinations. The AQB conducted
    comprehensive reviews of the State appraiser examinations in 1991,
    1995, and 2002.
    Standards of Professional Practice
        Since the enactment of Title XI, the distribution of the generally
    accepted appraisal standards, USPAP, has received wide dissemination,
    increasing from 10,000 copies annually in the early 1990's to 80,000
    copies in 2003. With this increased exposure has come a considerable
    increase in the number of inquiries to the authors of USPAP, the
    Appraisal Standards Board. Accordingly, the Appraisal Standards Board
    has offered a significant amount of guidance to appraisers on
    performing appraisals in conformance with these standards.
        The Board conducts public meetings around the Nation and publicly
    exposes all proposed changes to USPAP. Any changes to USPAP must be
    adopted in a public meeting. The Board has issued 27 Advisory Opinions
    to date and publishes Questions and Answers on USPAP every month on the
    Foundation website (www.appraisalfoundation.org). The USPAP document is
    available to the general public on the Foundation website and all
    appraiser regulators are granted permission to reproduce the document
    free of charge.
        At the time of enactment of Title XI, USPAP was revised
    periodically throughout the year (as often as quarterly). The standards
    were subsequently published in a format that was revised twice a year
    and for the past several years have been published on an annual basis.
    It is our hope to publish USPAP once every 2 years in the near future.
    In order to promote consistent USPAP enforcement among the States, the
    Foundation has published two editions of a publication entitled A
    Digest of Court Cases and Administrative Rulings Citing USPAP.
    Advisory Councils
        In order to ensure that the work product of our two Boards
    continues to reflect the needs of the regulatory community and the
    marketplace, we have established two advisory councils. One council,
    known as The Appraisal Foundation Advisory Council, has over fifty
    members that are either nonprofit organizations or Government agencies.
    The membership of this diverse group ranges from the American Bankers
    Association and the National Association of Realtors to the U.S.
    Department of Justice and the Internal Revenue Service.
        Our other advisory council, the Industry Advisory Council, provides
    valuable input from the for-profit sector. Members of this council
    include such companies as the Bank of America, Deloitte & Touche,
    Washington Mutual, Prudential Insurance, and Wells Fargo. Membership
    listings of both advisory councils are included with this testimony as
    Attachments #2 and #3.
    Government Assignments Beyond Title XI
        In recent years, The Appraisal Foundation has also provided
    assistance to the Federal Government outside of its specific Title XI
    responsibilities. Because we are viewed as an objective, unbiased
    resource, we have been approached by several Federal Government
    agencies to perform evaluations on their behalf. We have been engaged
    by the U.S. Forest Service, the Bureau of Land Management, the
    Inspector General of the Department of Interior, and the Office of
    Special Trustee for American Indians to perform evaluations of their
    appraisal policies and procedures.
    Title XI Is Working as Intended
        One of the most tangible measurements of how Title XI has performed
    is a review of the disciplinary action taken by the States for the
    period of 1992-2002. During that time period, a total of 4,360
    disciplinary actions were reported by the States to the Appraisal
    Subcommittee. Of these, over 1,250 were serious violations which
    resulted in the suspension, revocation, or voluntary surrendering of an
    appraiser's State credential; over 1,200 individuals that, due to
    competency or conduct, were no longer permitted to make value
    determinations in federally related transactions.
        As to alternatives to the existing structure of Title XI, it is
    important to keep several factors in mind. First, the Federal Registry
    of real estate appraisers maintained by the Appraisal Subcommittee
    currently contains over 95,000 appraisers. Accounting for individuals
    who hold a credential in more than one State, the total number of real
    estate appraisers is estimated to be approximately 80,000. There are
    several fine national appraisal organizations, including the Appraisal
    Institute and the American Society of Appraisers in attendance today.
    However, the majority of real estate appraisers in the United States
    are not affiliated with any professional appraisal organization.
    Accordingly, absent the current system, any type of ``self-regulating''
    alternative is virtually impossible due to the fact that most
    appraisers are not subject to peer review procedures.
        Regarding the elimination or dilution of the Federal oversight
    component of Title XI, it is important to remember that Title XI was
    enacted, not as consumer protection legislation, but rather from a
    safety and soundness perspective to ensure the integrity of the deposit
    insurance fund. That need continues to exist today and should not be
    delegated exclusively to the 55 States and territories regulating
    appraisers.
        For example, the States currently adhere to the minimum standards
    and qualification thresholds established by The Appraisal Foundation
    because they are required to by law. Absent that requirement, States
    would be free to establish very low threshold levels or none at all.
    This could severely impact the competency of appraisers and meaningful
    enforcement in certain States and have a significant negative effect on
    consistency among all of the States. Without credible enforcement,
    there could be a detrimental impact on the safety and soundness of the
    nation's lending institutions.
    Recommendations
        As stated above, we believe that Title XI is generally working as
    intended and should remain intact. However, in the event that specific
    improvements were sought, The Appraisal Foundation would offer the
    following recommendations:

     Greater Regulatory Latitude for the Appraisal Subcommittee:
        The Appraisal Subcommittee should be given a series of graduated
        regulatory options for oversight of the State appraiser regulatory
        programs; as opposed to the single option it now is provided.
     State-Licensed Appraisers Should Meet the Qualification and
        Examination Requirements of the Appraiser Qualifications Board: The
        State licensure category was a last minute addition to Title XI. It
        appears that not including the State licensed classification along
        with the State certified classifications was an oversight.
     Mandate Reciprocity Among the States: With the ongoing
        consolidation of the lending community, it is in the interest of
        improved interstate commerce that artificial barriers to practice
        be removed. At present, the Appraisal Subcommittee is charged with
        only ``encouraging'' reciprocity.
    Conclusion
        Mr. Chairman, when recently confronted with concerns about the
    accounting profession relating to Enron, Worldcom, and Arthur Andersen,
    the Senate Banking Committee addressed the issue by increasing Federal
    oversight through the creation of the Public Company Accounting
    Oversight Board (PCAOB). Similarly, with the revelations about
    financial reporting variances at Freddie Mac, this Committee is
    pursuing options for greater Federal oversight of the Government
    Sponsored Enterprises (GSE's).
        Fifteen years ago, your colleagues were faced with a deposit
    insurance crisis and opted to create a regulatory system that includes
    Federal oversight of the State regulatory programs that credential the
    individuals who determine the value of the underlying assets of our
    financial institutions. To dilute or remove Federal oversight at this
    time would be sending the wrong message at the wrong time.
        Again, we appreciate the opportunity to share our perspective with
    you today and would be pleased to answer any questions.

                 PREPARED STATEMENT OF ALAN EUGENE HUMMEL, SRA
               Immediate Past President, The Appraisal Institute
          Chief Executive Officer, Iowa Residential Appraisal Company
                                  On Behalf of
                          The Appraisal Institute and
           The American Society of Farm Managers and Rural Appraisers
                                 March 24, 2004
        Chairman Allard and Members of the Subcommittee, I am Alan Eugene
    Hummel, President of Iowa Residential Appraisal Company in Des Moines,
    Iowa, and Immediate Past President of the Appraisal Institute. I am
    pleased to be here today on behalf of the Appraisal Institute and the
    American Society of Farm Managers and Rural Appraisers, which together
    represent more than 20,000 real estate appraisers in the United States.
    Thank you for holding this hearing on the effectiveness of Federal
    requirements established approximately 15 years ago that marked the
    beginning of Federal involvement in State-licensing and certification
    requirements for real estate appraisers in the United States.
        Real estate appraisers play a strategic role in our country's real
    estate financing system. A professional appraiser's objectivity,
    training, experience, and ethics are fundamental characteristics that
    help participants in residential and commercial real estate mortgage
    transactions assess the value of real estate and understand the risks
    involved in collateral lending. Trillions of dollars are invested in
    real estate in the United States, so it is of paramount importance that
    appraisers be qualified and adequately trained and have sufficient
    experience in the type of property under consideration. Also important
    is a system of enforcement with the authority to help ensure that
    appraisers are properly educated and experienced.
        Both the appraisal profession in general and our professional
    organizations in particular have been directly impacted by the
    implementation of Title XI of the Financial Institutions Reform,
    Recovery, and Enforcement Act of 1989 (FIRREA). We have serious
    concerns with how the law and subsequent regulation is affecting the
    profession. We are concerned with the quality of appraisals being used
    in our Nation's mortgage financing system today. A fundamental goal of
    FIRREA was to raise the professionalism of appraisers involved in
    federally related real estate transactions; yet we have concluded that
    this goal has not been met. In fact, the result has been to promote a
    system that lessens the professionalism of appraisers rather than
    strengthens it. Having provided for only ``minimum'' qualification
    requirements and meager oversight authority, the implementation of
    FIRREA has failed to offer incentives to appraisers to seek additional
    training, education, and experience. In addition, many State appraiser
    licensing boards and the Federal oversight authority allow bad actors
    to remain in the system.
        Competent and qualified real estate appraisers serve as a crucial
    safeguard in our banking system, but lax enforcement and ineffective
    Federal oversight serve to diminish this safeguard. Thus, we are here
    to alert Congress that the system FIRREA envisioned is broken and needs
    to be fixed if we are to avoid a financial crisis on the scale of the
    Savings and Loan disaster of the 1980's or the accounting scandals in
    the 1990's.
    Appraiser Regulatory Structure
        As you know, the Savings and Loan crisis of the 1980's led Congress
    to enact FIRREA. Title XI, the ``Real Estate Appraisal Reform
    Amendments,'' was enacted to protect Federal financial and public
    policy interests in real estate related transactions by requiring that
    real estate appraisals be performed by individuals with demonstrated
    competency in both education and experience. FIRREA mandated licensing
    or certification pursuant to national standards, but the resulting
    regulatory structure has become tangled and overly complex. The system
    involves:

     Licensing and certification boards in all States and
        territories, each with differing interpretations of FIRREA, as well
        as differing agendas and funding;
     Minimum qualifications criteria established by the Appraiser
        Qualifications Board of The Appraisal Foundation, a nonprofit
        education organization;
     Appraisal standards (the Uniform Standards of Professional
        Appraisal Practice) established by the Appraisal Standards Board of
        The Appraisal Foundation; and
     Federal oversight by the Appraisal Subcommittee of the Federal
        Financial Institutions Examinations Council.

        Unfortunately, FIRREA and its resulting complexity have adversely
    affected the appraisal profession and, in our view, put consumers, the
    States and the Federal insurance funds at risk. Much of the complexity
    was identified by the General Accounting Office (GAO) in its
    investigation last year. We believe the problems are in four
    categories:

     Lack of accountability;
     Ineffective and counter-productive State enforcement programs;
     Minimum qualifications and discouragement of professional
        development; and
     Inadequate appraiser independence safeguards
    The Multi-Pronged System Lacks Accountability
        Title XI created the Appraisal Subcommittee to oversee the
    activities of the States and many of the activities of The Appraisal
    Foundation. The Appraisal Subcommittee is essentially a junior subset
    of the Federal Financial Institutions Examinations Council. The
    Appraisal Subcommittee funds a portion of The Appraisal Foundation's
    expenses. Ironically, individual State-certified and licensed
    appraisers fund the Appraisal Subcommittee operations through license
    fees collected by the States. Individual appraisers are assessed a $25
    annual fee passed through to the Appraisal Subcommittee, which has
    amassed a sizable reserve fund for no identified purpose.
    Effective Oversight of the Appraisal Subcommittee
        We are concerned with the lack of oversight for the Appraisal
    Subcommittee. By and large, the Appraisal Subcommittee is operating in
    an insulated environment without any practical accountability measures.
        Providing Federal oversight over an activity traditionally
    regulated by the States (licensing), the Appraisal Subcommittee is a
    hybrid Federal agency that has conducted much of its business in the
    dark and with no direct input from the appraisal profession. The
    Appraisal Subcommittee board is composed of staff bank examiners and
    program staff from the five Federal financial institution regulators
    and one from the Department of Housing and Urban Development. It meets
    quarterly in Washington, but does not allow for public access or
    participation to their activities and meetings.
        The Appraisal Subcommittee staff performs audits of State appraiser
    boards on a 3-year rotation cycle, and works with State boards on Title
    XI compliance. The Appraisal Subcommittee posts some of the results of
    its audits on its website and a portion of this information is released
    in its Annual Report to Congress. Section 1103 of Title XI requires the
    Appraisal Subcommittee to issue an annual report to Congress no later
    than January 31 of the following year. The report itself historically
    has been little more than a financial statement, containing sparse
    information on the audits that were conducted with few compliance
    statistics. In addition, it is now nearly April and the 2003 Annual
    Report apparently has yet to be issued to Congress. Similar delays have
    occurred the past, like last year when the 2002 Annual Report was not
    issued until April 16.
    Appraisal Subcommittee Oversight of States
        Not only are the Appraisal Subcommittee's operations insular, but
    their powers are also impotent. Recommendations from the Appraisal
    Subcommittee are routinely disregarded by State appraisal boards,
    contributing to a cycle of ineffective enforcement. The only real power
    the Appraisal Subcommittee has over State appraisal boards is the
    authority to ``decertify'' a State if it is found to be out of
    conformance with Title XI. This specific power has generally become
    known as the ``atomic bomb,'' because if it were to be invoked,
    virtually all mortgage lending in that State would cease. The Appraisal
    Subcommittee has never used this power, although it has threatened to
    do so. Such an unrealistic threat is an ineffective way to promote
    sound processes in the States.
        According to the latest annual report issued by the Appraisal
    Subcommittee, a full 43 percent of the State appraisal regulatory
    agencies reviewed in 2002 either failed to resolve complaints against
    real estate appraisers expeditiously or were inconsistent in applying
    disciplinary sanctions; failed to pursue all alleged violations of the
    Uniform Standards of Professional Appraisal Practice; or did not
    adequately document enforcement-related files. In addition, one State
    failed to forward disciplinary actions to the Appraisal Subcommittee,
    which is required by Title XI and Appraisal Subcommittee Policy
    Statement 9. The fact that so many State appraisal boards failed to
    resolve complaints against appraisers in an expeditious manner is
    deeply troubling.
        Examples of State appraisal board actions that have occurred
    without consequence from the Appraisal Subcommittee include:

     Hundreds of appraisers in Oklahoma who failed to meet the
        minimum requirements for licensing and certification were ``grand-
        fathered'' under a new licensing law passed by the Oklahoma
        Legislature and endorsed by the Oklahoma Real Estate Appraiser
        Board Division;
     Failure of the New York Division of Licensing Services to
        revoke an appraiser's license following a guilty plea for ``filing
        false documents,'' leading to 2 years probation and over $100,000
        in fines and restitutions, because his certification would ``not
        involve unreasonable risk to the safety and welfare of the general
        public.'' \1\
    ---------------------------------------------------------------------------
        \1\ Christian Murray, ``Appraising the Appraisers,'' Newsday,
    August 9, 2002.
    ---------------------------------------------------------------------------
     Complaints against appraisers in multiple States that have
        gone unresolved up to 8 years.
    Inadequate Structure and Regulatory Slights of Hand
        In practice, FIRREA has weighed heavily on the development of
    appraisal practices in nonfederally related transactions, such as
    appraisal consulting and market analysis. When States implemented their
    FIRREA requirements for State licensing and certification, many of them
    wrote their laws to include all appraisal services performed in their
    State. These so called ``mandatory'' States require appraisals to be
    performed by licensed or certified appraisers and in conformance with
    the Uniform Standards of Professional Appraisal Practice. However, even
    in so called ``voluntary'' States, where nonlicensed or certified
    appraisers are allowed to ``appraise'' property, a de facto requirement
    to be licensed and certified exists. As a result, transactions outside
    of traditional mortgage lending are effectively being dictated by
    policies written and enforced by bank examiners (the Appraisal
    Subcommittee). We believe the Appraisal Subcommittee should have a more
    diverse membership since it will likely continue to impact
    practitioners delivering a wide range of appraisal and valuation
    assignments.
        Finally, when implementing FIRREA, the five Federal financial
    institution regulators failed to take the licensing and certification
    requirement seriously. Through regulation, the law was effectively
    modified to exempt nearly 90 percent of all transactions in the
    residential mortgage market from being appraised by licensed and
    certified appraisers. As originally contemplated, all transactions
    greater than $15,000 would be required to be appraised by a licensed
    and certified appraiser, but with a regulatory slight of hand the
    threshold was raised to $250,000 before a licensed or certified
    appraiser was required. As a result, a significant portion of the real
    estate valuation work throughout the country takes place in the form of
    ``evaluations,'' or ``broker price opinions'' (BPO's), or through
    ``competitive market analysis'' (CMA) reports. In many cases,
    evaluations are done by staff of organizations that have a vested
    interested in a real estate transaction. This negates the benefit of
    having an independent third party involved in the real estate
    transaction, while omission of a licensing or certification requirement
    for properties under $250,000 creates a disruptive gap in the
    enforcement of appraisal standards.
    Ineffective and Counter-Productive State Enforcement
        While there are many dedicated individuals on State appraiser
    boards, many times their ability to carry out their charge is
    compromised due to lack of funding or administrative support. Too
    often, complaints against real estate appraisers in States are not
    reviewed by State appraiser boards, leading to a lack of disciplinary
    action against poorly performing appraisers. Some State boards have
    been known to spend inordinate time and research and collect fines for
    inconsequential offenses, leaving little time for enforcement of major
    issues.
        Concerns with State enforcement agencies include:

     Failure to review complaints in a timely manner or review them
        at all;
     Failure to apply appraisal review procedures consistently;
     Failure to proscribe disciplinary action against appraisers
        for poor performance; and
     Failure to provide adequate resources to investigate
        complaints as licensing fees are often commingled with the State's
        general fund and not used for oversight purposes as intended.
    Neglectful Supervision and Administration
        Since Title XI was enacted, it has been difficult to achieve
    necessary consistency among the States for enforcement of both
    standards and certification requirements. Whether through a lack of
    resources or a lack of will by those charged with providing oversight,
    the current system allows some unscrupulous and unqualified appraisers
    to continue practicing and has little or no recourse for their actions.
    In fact, some of these very appraisers have been linked to mortgage
    fraud schemes throughout the country.
        For example, within the last year, a real estate appraiser in New
    York was found guilty and convicted of a felony for grossly inflating
    appraisals. His State license was revoked, and he served a jail
    sentence for 1 year. Upon his release, he challenged the State
    appellate court to be regranted his license. The court overturned the
    ruling of license revocation, determining that he had served his time
    sufficiently and that he must return to becoming a ``beneficial member
    of society.'' Amazingly, this fraudulent appraiser charged with
    participating in numerous land scam schemes is now a practicing
    appraiser--sanctioned--in New York.
        New York is not alone in handling such cases carelessly, as a
    similar case was brought to light last month in Maryland. In June 2003,
    an appraiser who pled guilty to appraisal fraud admitted that the
    Government lost between $500,000 and $800,000 due to his actions. In
    the fall, he applied to renew his license. On the online application,
    he answered ``no'' to the question of whether or not he had ever been
    convicted of a felony. According to his attorney, he ``honestly''
    answered no, because in the Federal system, one is not convicted until
    sentenced, and the appraiser was not sentenced until last month, in
    February. Thus, the Maryland Commission of Real Estate Appraisers and
    Home Inspectors renewed his license last October for another 3 years. A
    spokesperson for the Maryland Commission said to the Baltimore Sun,
    ``all we have to go by is the honesty of the licensee. We are not
    required to perform background checks; moreover, the financial and
    personnel resources are not available at this time.'' \2\
    ---------------------------------------------------------------------------
        \2\ John B. O'Donnell, ``Real Estate Appraiser Faces Sentencing in
    Property Flipping Plot; Man Still Holds License Despite Pleading
    Guilty,'' Baltimore Sun, February 27, 2004.
    ---------------------------------------------------------------------------
        Deficiencies with State appraisal complaint systems were noted in
    the GAO Report, most notably in relation to a Government Sponsored
    Enterprise (GSE) that recently began making referrals of poor
    appraisals to State appraiser boards. Eight hundred and sixty referrals
    were made to 45 different State regulatory agencies between August 2001
    and August 2002. Officials from the GSE commented to the GAO 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 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.
        While FIRREA's complexity is causing problems with State
    enforcement, it is also placing a significant burden on appraisers
    working in more than one State. For example, a member of the Appraisal
    Institute from Virginia recently applied for a license in the State of
    Indiana. This individual is currently certified in Virginia, Maryland,
    New Jersey, West Virginia, Ohio, and Tennessee. After submitting the
    lengthy documentation on education and experience, the appraiser was
    notified that his application was to be tabled for 6 months due to his
    education not meeting their standards. This individual has taken
    virtually all of the courses offered by the Appraisal Institute and
    regularly teaches advanced curriculum courses across the country and in
    other countries.
        Appraisers are paying a heavy price for redundant licenses while
    being denied others because of the bureaucratic nightmare created by
    FIRREA. A substantial percentage of real estate appraisers in this
    country are asked to perform real estate appraisal assignments that are
    not in their home State. This was not a major problem prior to the
    enactment of FIRREA; however, with its implementation each State must
    now take appropriate measures to facilitate the work of out-of-State
    appraisers who do business in multiple States. Our organizations
    believe that there are two appropriate methods for handling interstate
    appraisal work. The first method, ``Temporary Practice,'' is mandated
    by Title XI, but unfortunately this fact was overlooked by many States
    and this provision of Title XI has not as yet been properly implemented
    throughout the country.
        The second method, ``Reciprocity,'' is not mandated by Title XI but
    in most cases will provide the maximum benefit to the public with the
    least amount of difficulty for the State regulators. In many parts of
    the country, the geographic areas for an appraiser's day-to-day
    business may lie within two or three States. In such cases, the
    ``temporary practice'' provisions are not appropriate to handle the
    appraiser's out-of-State business and the appraiser may be forced to
    become licensed or certified in two or more States. This means that
    several States may be required to administer the same process over and
    over again with no demonstrable benefit. In this situation, reciprocity
    agreements make a great deal of sense because they avoid duplication of
    effort and, in doing so, lessen the administrative burden on each of
    the
    various States involved and the appraiser. To date, 12 jurisdictions
    have no reciprocal agreements in place, and those that do are not
    universal between all States. Virtually no new reciprocal agreements
    have been drafted since the early 1990's.
    Minimum Qualifications and Discouragement of Professional Development
        An important goal of FIRREA was to ensure that appraisals are
    performed by competent appraisers. However, in practice, FIRREA has had
    the opposite effect because it stresses minimum qualifications. This
    emphasis has severely curtailed the continuing development of a true
    appraisal profession.
        This is explained well by users of appraisal services, who are in
    the best position to speak to changes in quality of appraisal services
    since the passage of FIRREA. In a poll conducted recently by the
    Appraisal Institute of significant users of appraisal services,\3\ 50
    percent responded that the quality of appraisal services and appraisal
    reporting has declined, whereas only 28 percent said appraisal services
    and reporting have improved. This is consistent with discussions our
    organizations have had with users of appraisal services for the past
    several years.
    ---------------------------------------------------------------------------
        \3\ ``Appraisal Quality Post-FIRREA,'' A Survey of the Appraisal
    Institute's 2000-2004 Client Advisory Committee Members, March 21,
    2004.
    ---------------------------------------------------------------------------
        As we reflect upon FIRREA, it is clear that the requirements for
    licensing and certification were set too low. Unfortunately, many
    clients see the possession of a license to be the only necessary
    qualification and stop short of fully considering the issue of
    competency for a particular appraisal. Likewise, many appraisers feel
    it is enough merely to meet the minimum requirements. What the FIRREA
    legislation missed is recognition that attaining the minimum level of
    education and experience for a license or certification does not
    necessarily qualify the licensee as competent to appraise.
        While our professional organizations maintain high standards and
    strict codes of ethics and effective peer review, less than 40 percent
    of all licensed and certified appraisers choose to be affiliated with
    such organizations. Currently, there are approximately 80,000 licensed
    and certified appraisers in the United States; out of this total;
    approximately 50,000 appraisers do not belong to professional appraisal
    organizations.
        Those appraisers that have only met State licensing and
    certification requirements tend to be less experienced and qualified
    than appraisers with professional designations; 84 percent of users of
    appraisal services say this is the case. Ironically, after FIRREA was
    passed, our organizations saw appraisers retreat from professional
    organizations, as the Federal Government dictated that minimum levels
    were all that were necessary to perform appraisals in federally related
    transactions. As an example, in the case of the Appraisal Institute,
    from the early to late 1990's, membership dropped from over 35,000
    members to slightly more than 16,000 members. The Appraisal Institute
    was not alone in this troubling circumstance.
        Particularly problematic is a bizarre discrimination provision
    formulated against designated appraisers contained in Section 1122 of
    FIRREA, the ``Anti-Discrimination'' clause. This section states:

            ``Criteria established by the Federal financial institutions
            regulatory agencies . . . for appraiser qualifications in
            addition to State certification or licensing shall not exclude
            a certified or licensed appraiser for consideration for an
            assignment solely by virtue of membership or lack of membership
            in any particular appraisal organization.''

        In this case, the mischaracterized ``discrimination clause'' of
    FIRREA actually promotes discrimination against appraisers who have
    practiced appraisal for years and have achieved the highest credentials
    the industry offers. This section of FIRREA has been read to mean one
    need not be a member of a professional organization to be an appraiser.
    While this statement may be true, making such a statement is much like
    saying that consumers seeking medical care should not seek board-
    certified physicians or that a school prefers to hire people with GED's
    over those with Ph.D.'s. Fundamentally, it fails to recognize the
    intense work and diligence that thousands of professional appraisers
    have put into earning and maintaining their status as the most
    competent and experienced appraisers in the profession. The public and
    the real estate community should be aware that there are professional
    organizations that confer designations to appraisers who have advanced
    themselves significantly beyond the minimum requirements of FIRREA.
        For decades it has been the professional organization and societies
    that have developed and maintained the basic principles and
    methodologies used by today's practitioners. Without professional
    organizations, the fundamental body of knowledge of real estate
    valuation would not exist. To dismiss this segment of the lifeblood of
    the profession is a grave oversight with serious repercussions.
    Inadequate Appraiser Independence Safeguards
        While FIRREA did provide for some separation between real estate
    appraisal and loan production inside financial institutions, FIRREA
    failed to adequately address the issue of appraiser independence.
    Although Federal agencies issued the Interagency Appraisal and
    Evaluation Guidelines in 1994, recent bank examinations have indicated
    that this separation is failing to curb pressure to coax real estate
    deals along by influencing the independent judgment of appraisers. In
    October 2003, the five financial institution regulators issued an
    interagency statement reminding financial institutions that the 1994
    Guidelines require that borrowers and loan production staff to not
    exert influence over the selection of appraisers. However, our members
    report that this is a regular occurrence. In fact, some financial
    institutions, mortgage brokers and others require a predetermined value
    to be met by an appraiser in order to receive future assignments from
    that institution. Such comments are often backed up by threats of
    coercion and nonpayment for services. FIRREA was established to avoid
    such circumstances, yet they are occurring every day under its purview.
        There are relatively few options that appraisers have when
    confronted by inappropriate client pressure:

     First, the appraiser could turn down the assignment, or just
        say no. Many appraisers do this; however, given the dilution of the
        licensed appraiser market, our members report that it is likely
        that a financial institution will find an appraiser who is willing
        to bend to their request.
     Second, the appraiser could tell the individual ordering the
        appraisal that national uniform standards and State and Federal law
        require appraisers to perform assignments ethically and competently
        and that they would like to discuss and resolve any remaining
        concerns or issues. Appraisers and clients have such conversations
        on a regular basis, but appraisers are oftentimes faced with having
        to meet a predetermined value. This is particularly the case with
        many mortgage brokers and others whose compensation is driven by
        production.
     Third, the appraiser could report the activity to the
        appropriate enforcement authority. However, when doing so, the
        appraiser would have to ensure it was sent to the proper agency.
        Complaints against national banks would have to be sent to the
        Office of the Comptroller of the Currency; credit unions to the
        National Credit Union Administration, etc. Many parties, such as
        some mortgage brokers, are completely outside of a regulatory
        system. In these cases, the appraiser is simply forced to lose a
        client.

        In some cases, bank examinations have uncovered unscrupulous
    activities. Oftentimes, the activities go unchecked an unreported. A
    particular problem appears to revolve around the fact that those who
    have a vested interest in the closing of the deal are ordering the
    appraisals. The 1994 Interagency Guidelines and the 2003 Interagency
    Statement call for a separation of loan production and credit analysis.
    However, full separation has never been realized, particularly in the
    areas of mortgage lending and brokerage. We believe that this is an
    inherent weakness of FIRREA that should be addressed immediately.
    Legislative Recommendations
        The Appraisal Institute urges Congress to explore the following
    suggestions as a starting point for addressing current deficiencies.
    These suggestions emphasize improving State appraisal board complaint
    processes, inserting accountability measures over the Appraisal
    Subcommittee and promoting consumer awareness and professionalism.
    Consider:

     Requiring the Appraisal Subcommittee to report to Congress
        annually their assessment of the effectiveness of each State's
        enforcement processes as part of their Annual Report, including
        results of all audits performed that year and a performance rating
        for all State appraisal boards.
     Requiring adequate funding for State appraisal boards for
        disciplinary functions enforced by the Appraisal Subcommittee.
     Modifying the makeup of the Appraisal Subcommittee to reflect
        broader representation, including an industry advisory council.
     Requiring the Appraisal Subcommittee to issue guidance to
        States addressing common deficiencies.
     Requiring the Appraisal Subcommittee to conduct public
        meetings.
     Requiring the Appraisal Subcommittee to consult and interview
        industry participants when conducting field reviews of State
        appraisal board operations.
     Requiring the Appraisal Subcommittee to share information from
        the National Registry with other Federal agencies, including the
        Federal Bureau of Investigation for antifraud purposes.
     Requiring the head of the Appraisal Subcommittee be confirmed
        by the U.S. Senate.
     Ensuring accountability of the Appraisal Subcommittee, and
        only then, providing it with authority to sanction consistent with
        its responsibility to monitor the activities of State appraisal
        boards.
     Granting the Appraisal Subcommittee authority for reciprocity
        of qualifications among licensing jurisdictions.
     Extending authority to the Appraisal Subcommittee for uniform
        temporary practice among licensing jurisdictions.
     Recognizing and encouraging the use of designated appraisers
        with qualifications beyond merely licensed and certified.
     Providing penalties for engaging in appraiser coercion and
        creating adequate resources for appraisers to report instances of
        such.
     Encouraging State appraiser boards to recruit the best
        qualified candidates to participate on board activities, regardless
        of membership in professional appraisal organizations.
     Requiring all regulated financial institutions to retain
        copies of all appraisals in loan files, even appraisals that are
        NOT used in the decision to lend.
    Conclusion
        There is an immediate need to find solutions to deficiencies in the
    system and our organizations are committed to assisting you in this
    effort. We look forward to working with you to identify solutions to
    solve the problems associated with the current appraiser regulatory
    structure.
                                   ----------
                    PREPARED STATEMENT OF EUGENE KACZKOWSKI
                   President, American Society of Appraisers
        Accredited Senior Appraiser, American Appraisal Associates, Inc.
                                 March 24, 2004
    Introduction
        Chairman Allard, Ranking Member Reed, and Members of the Housing
    and Transportation Subcommittee, the American Society of Appraisers
    (ASA) greatly appreciates the opportunity to provide its views to the
    Subcommittee on ``The Real Estate Appraisal Industry.'' We also
    appreciate the Subcommittee's interest in examining the impact of Title
    XI of FIRREA on the real estate appraisal profession, particularly with
    regard to protecting Federal financial interests and assuring the
    safety and soundness of real estate-related financial transactions in
    our marketplace. My name is Eugene Kaczkowski, and I serve as President
    of the American Society of Appraisers. I am an Accredited Senior
    Appraiser in the business valuation discipline and a Vice President
    with American Appraisal Associates, a full-service valuation consulting
    firm.
        ASA is our Nation's only multidiscipline professional appraisal
    society that teaches, tests, and credentials its members in every major
    field of the appraisal profession, including residential property and
    commercial real property valuation; business enterprise valuation;
    machinery and technical specialties; and valuations of fine arts,
    antiques, gems and jewelry. Attached to my testimony is a fact sheet
    providing additional information on ASA.
    Summary of Views
        The American Society of Appraisers believes that the state of the
    real estate appraisal profession is generally good and that enactment
    of Title XI of FIRREA in 1989 was, and continues to be, an
    indispensable and positive force in professionalizing the Nation's real
    estate appraisers. We are convinced that today's real estate
    appraisers, as a group, are far better educated, more competent and are
    held to a higher standard of ethics and accountability than their pre-
    FIRREA predecessors. Having said that, ASA also believes that there are
    some serious problems in the regulated environment in which today's
    real estate appraisers function and that Title XI needs to be
    modernized and tightened in order to correct those problems.
    The Pre-FIRREA World of Real Estate Appraisers
        Before discussing these problem areas and recommending some
    approaches to addressing them, I would like to take just a moment to
    revisit the conditions that made up the real estate appraisal industry
    prior to the enactment of Title XI. Pre-FIRREA, almost anyone could
    perform real estate valuations merely by declaring that they were
    competent to do so. At that time, there were few, if any, Federal
    requirements specifying the education, training, experience, and other
    skill sets necessary for an individual to estimate the market value of
    real estate collateralizing residential and commercial loans--sometimes
    totaling millions of dollars--made by federally insured financial
    institutions, guaranteed by Federal agencies like the FHA and VA or
    sold to investors in the secondary financial markets by the GSE's or
    their private sector counterparts. Only a handful of States had
    appraiser licensing programs of any kind. For the few that did,
    qualification requirements were inconsequential and nonlicensed
    individuals could continue to value real estate for virtually all
    transactions. These were the conditions that added billions of dollars
    in bailout costs to U.S. taxpayers when the savings and loan and
    banking industry crises occurred in the mid-to-late 1980's. What
    Congressional oversight committees, the General Accounting Office
    (GAO), and investigative reporters found when they examined the causes
    and consequences of the collapse was that in a shockingly large
    percentage of cases, the collateral for billions of dollars in
    defaulted real estate loans had been grossly overvalued by appraisers,
    sometimes because of incompetence and sometimes because they were
    pressured by lenders or developers to manufacture values sufficiently
    high to make the deal go.
        An important component of Congress' package of responses to the
    debacle and to the role of faulty and fraudulent real estate appraisals
    was the enactment of FIRREA and its Title XI system of State appraiser
    certification and licensing.
    What is Working in the Current Title XI System
        ASA believes that there is much good public policy incorporated
    into Title XI. We think that the certification and licensing system
    correctly balances the interests and the roles of State and Federal
    Governments and the private sector in professionalizing real estate
    appraisers and making them accountable for their actions. Under the
    current system, States are responsible for certifying and licensing
    appraisers and for disciplining them when they are found to be
    incompetent or dishonest. Title XI invests in the not-for-profit
    Appraisal Foundation, which is responsible for promulgating uniform
    appraisal standards (the Uniform Standards of Professional Appraisal
    Practice or USPAP) and for establishing uniform qualification
    requirements for the certification of appraisers. Finally, because the
    integrity and accuracy of real estate appraisals impact so many
    important Federal programs and financial interests, Title XI leaves to
    the Federal Government, through the Appraisal
    Subcommittee, responsibility for overseeing the effectiveness of the
    State appraiser regulatory programs and standards-setting work of the
    Appraisal Foundation.
        With a few noteworthy exceptions, which I will address, ASA
    believes Title XI's real estate appraiser certification and licensing
    system is working well. Today, there are more than an adequate number
    of State-certified and licensed real estate appraisers providing the
    uniform valuation services that are essential to our Nation's economy
    and to the cost-efficient operation of Federal programs. Under the
    current system, these appraisals are being performed in what we believe
    is a timely and cost-effective manner, utilizing valuation
    methodologies that are uniform across every region of our country.
    What Needs Correcting in the Title XI System
        Although we believe that Title XI is accomplishing its intended
    public policy purposes, there are some serious problems with the
    current system that ASA finds troubling and that we wish to bring to
    the Subcommittee's attention--including the failure of a small number
    of important Federal agencies to take advantage of it. Some of these
    problem areas fall within the clear jurisdiction of the Senate Banking
    Committee; others may require the attention of other Committees of the
    Congress. These are our concerns.
        (1) Problem: The current membership of the Federal Appraisal
    Subcommittee is too narrowly drawn. The Subcommittee lacks
    representation from nonbanking and nonhousing Federal agencies that
    administer programs or have regulatory responsibilities that rely on
    the competency of real estate appraisers and the appraisals they
    perform. The Department of Interior (for example, land exchanges and
    sales, and conservation easements), the Department of Transportation
    (for example, right-of-way issues), the Internal Revenue Service (for
    example, charitable contributions of real estate and real estate assets
    in estate and gift tax returns) and the Securities and Exchange
    Commission (for example, financial reports of public companies where
    real estate holdings are material) are examples of Federal agencies
    whose activities regularly intersect the world of real estate
    appraisals.
        Recommended solution: Although this issue needs to be analyzed in
    some depth, ASA believes that expanding the membership of the Appraisal
    Subcommittee would more accurately reflect the range of Federal
    interests in the work of real estate appraisers--and greatly maximize
    the benefits that the Federal Government receives from professional
    real estate appraisals.
        (2) Problem: The Appraisal Subcommittee lacks appropriate
    rulemaking powers necessary to ensure that States regulate appraisers
    in a way that is uniform and fully consistent with Title XI
    requirements. Time and experience have demonstrated that the authority
    of the Appraisal Subcommittee to ensure compliance with Title XI needs
    to be enhanced. Under existing law, the Subcommittee only has two
    options with respect to its enforcement of Title XI: De-certifying a
    State's entire appraiser certification program or jawboning its
    licensing agency to take actions required to put it into Title XI
    compliance. Neither option is adequate. Rulemaking authority is a time-
    tested, fair and cost-effective way not only to ensure State agency
    compliance with Title XI requirements but also to ensure reasonable
    enforcement uniformity among the States (see Problem 3 below).
        Recommended solution: Give the Subcommittee rulemaking authority.
        (3) Problem: The regulation of appraisers by the States has been
    uneven. The regulation of real estate appraisers by the licensing
    boards of the 50 States, the territories, and the District of Columbia
    has been disturbingly uneven and, in some cases, borders on
    ineffectual. Title XI contemplated a reasonable degree of uniformity
    and certainty in the way States would enforce compliance with the
    ethics, competency and other protocols of professional appraisal
    practice. Based on reports from our real estate valuation members, this
    is not happening to an adequate degree.
        Recommended solution: Ask the GAO, which did a good job fleshing
    out the landscape of Title XI's regulatory environment, to examine this
    issue and make recommendations on what States and the Federal
    Government need to do to improve the consistency and effectiveness of
    State compliance efforts.
        (4) Problem: Improvements in State reciprocity agreements and
    temporary practice permits are required.
        (a) Some States make the issuance of temporary practice permits
    difficult and very costly to obtain. Title XI recognized that real
    estate-related financial transactions requiring appraisal services are
    national (and often international) in scope, often requiring appraisers
    to travel from State-to-State on temporary practice assignments for a
    client. As a result, Title XI required States not to erect barriers to
    the issuance of temporary practice permits. Although local appraisers
    generally perform valuations of single-family properties in connection
    with mortgage financings, there are many instances in which national
    and regional mortgage lenders, real estate developers, insurance
    companies, and real estate investment trusts/partnerships hire major
    valuation firms or appraisers with a valuation specialty niche (for
    example, hotels, strip shopping malls, and office buildings) to
    appraise the market value of real estate in many States.
    Notwithstanding the efforts of the Appraisal Subcommittee to break down
    the barriers of some States to temporary practice, the problem remains.
        Recommended solution: A consensus is developing between appraisers
    and major users of their services in support of a ``driver's license''
    approach to temporary practice. Title XI should be amended to provide
    that appraisers duly certified or licensed and in good standing in one
    State must have their credentials honored in all other States for
    legitimate temporary practice purposes only.
        (b) Reciprocity still needs improvement. In many areas of the
    country, real estate appraisers regularly practice on a
    multijurisdictional basis. The District of Columbia Metropolitan Area
    (DC, Maryland, and Virginia) is a typical example of a situation where
    an appraiser certified or licensed in one jurisdiction is likely to
    have clients in the other two jurisdictions. Because States frequently
    differ in their qualifications requirements for licensing or
    certification and because each State has its own fee structure, it is
    impractical and inefficient for an appraiser to obtain an original
    certification/license from each jurisdiction. Title XI contemplated
    easy reciprocity between and among States in situations where
    appraisers live and practice near borders with other jurisdictions.
        Recommended solution: Title XI should be amended in a way that
    requires States to enter into mutually beneficial reciprocity
    agreements that facilitate interstate commerce.
        (5) Problem: Because each State's appraiser licensing board
    currently must approve all primary and continuing education courses
    offered its licensees and licensee applicants, hardships are imposed on
    national education providers and practitioners. Professional appraisal
    societies offer their members and other qualified individuals a wide
    range of valuation course work. Providing continuing education to its
    members from across the country is a central feature of ASA's annual
    conferences. The hardship on education providers is created when ASA--
    and other national appraiser education providers--must seek approval
    from each of the home States of its members in order for their
    continuing education credits to be accepted.
        Recommended solution: A central clearinghouse should be established
    for the purpose of approving appraiser education course work for all
    States.
        (6) Problem: The Appraiser Qualifications Board of the Appraisal
    Foundation lacks authority to establish qualification requirements for
    licensed appraisers in federally related transactions. An amendment to
    Title XI, approved approximately 2 years after its enactment, severely
    limited the authority of the Appraisal Foundation to establish
    qualifications for licensed appraisers in federally related
    transactions. The result is an anomalous public policy situation in
    which the foundation is able to establish qualifications for certified
    appraisers but not for the lesser-skilled licensed appraisers.
        Recommended solution: ASA respectfully urges the Banking Committee
    to amend Title XI by restoring the foundation's authority to set
    minimum qualification requirements for licensed appraisers. The
    limitation on that authority was driven by a concern--among some
    mortgage market players--that the Qualifications Board would set
    qualification requirements so high that a shortage of appraisers would
    be created. Although that concern was highly dubious when it was made a
    decade ago, it has no validity today. Ironically, the concern today
    within the professional appraisal community and for many government
    officials is that qualifications for licensed appraisers in a number of
    States are inadequate. And, it is long past the time to end the
    illogical public policy disconnect between the Qualifications Board's
    authority to set standards for certified appraisers but not for
    licensed appraisers.
        (7) Problem: The Federal bank regulatory agencies, by rulemaking,
    have limited the application of Title XI's professional appraisal and
    uniform standards requirements to loans above $250,000 for residential
    property and $1 million for commercial property. When Title XI was
    enacted in 1989, it included a de minis of $15,000. Although federally
    insured financial institutions and the GSE's are free to apply Title
    XI's provisions to transactions below the ``de minimis'' levels (and
    many do), ASA regards their establishment as unnecessarily jeopardizing
    ``safety and soundness.'' The Uniform Standards of Professional
    Appraisal Practice permit certified and licensed real estate appraisers
    to tailor their services to meet their customers' needs as to speed and
    cost, without violating USPAP's ethics provisions. Accurate valuations
    of the collateral for loans by federally insured financial institutions
    are an indispensable safety and soundness component of a federally
    related real estate transaction.
        Recommended solution: ASA urges the Banking Committee to request a
    GAO study of the de minimis issue, including an analysis of its safety
    and soundness consequences.
    Conclusion
        The American Society of Appraisers believes that the real estate
    appraiser certification and licensing system established by Title XI is
    working successfully to protect not only Federal financial interests
    but also the interests of consumers and the appraisal profession as
    well. ASA looks forward to working with the Senate Banking Committee to
    build on the current system for the purpose of strengthening it and
    correcting current weaknesses. I would be glad to answer any questions
    you may have.
                                   Attachment
    American Society of Appraisers: Fact Sheet
        The American Society of Appraisers (ASA) is the only appraisal
    society in the United States that represents appraisers of all types of
    property--real, personal, and intangible. ASA has more than 6,000
    professional members committed to providing consumers the best
    valuation expertise available. An international organization, ASA was
    founded in 1936 and is currently headquartered outside of Washington,
    DC, in Herndon, Va.
        For nearly 70 years, ASA has fostered professional excellence.

     ASA accredits members only after they complete a rigorous
        testing and evaluation process that requires years of study,
        training, and peer review;
     ASA ensures that its accredited appraisers provide consumers
        and businesses with independent opinions of value;
     ASA provides continuing education programs and training
        opportunities to members;
     ASA maintains a strong role in the Appraisal Foundation, a
        nonprofit organization recognized by the U.S. Congress as the sole
        source for uniform appraisal standards and qualifications; and
     ASA requires all its members to subscribe to the Appraisal
        Foundation's Uniform Standards of Professional Appraisal Practice
        (USPAP) and ASA's Principles of
        Appraisal Practice and Code of Ethics, which the society enforces
        through a grievance process that allows clients to challenge
        appraisals rendered by ASA members.

        ASA members come from all 50 States, Puerto Rico, the U.S. Virgin
    Islands, and 44 foreign countries (including Canada, Mexico, China, and
    the Philippines) and represent the following disciplines:

     Appraisal Review and Management: This discipline requires
        practitioners to manage multidiscipline appraisal practices, review
        appraisals performed by others and report the results of those
        reviews.
     Business Valuation (BV): Business valuation appraisers value
        intangible assets--patents, trademarks, copyrights, intellectual
        property; provide independent, unbiased opinions of values for
        businesses; and prepare merger and acquisition analysis and other
        studies. BV appraisers work for large accounting and financial
        consulting firms.
     Gems and Jewelry: ASA appraisers and Master Gemologist
        Appraisers assess every kind of gem and jewel, from mineral
        specimens and rough stones to art, designer, antique, and period
        jewelry.
     Machinery and Technical Specialties: Professional appraisers
        value machinery and equipment, cost surveys, aircraft, boats, oil
        and gas, mines and quarries, public utilities, IT property, and
        natural resources. They provide appraisals for Fortune 500 and
        other companies for the purposes of sale, acquisition, ad valorem
        tax, eminent domain, collateralization, or insurance.
     Personal Property: In this discipline, appraisers value art,
        antiques, books, automobiles, and residential contents, including
        every possible type of property from African sculpture to wines.
     Real Property: These appraisers may specialize in property
        that is urban, residential, ad valorem, rural, or timberland
        (including the land, improvements and all associated structures and
        additions). ASA appraisers can produce appraisals for acquisition
        or disposition, mortgages, insurance, estate taxes, etc.

        Many ASA members are widely recognized experts and pioneers in
    their fields. They include:

     the founders of the business valuation appraisal profession,
        which comprises valuers of business and business interests of all
        sizes, from sole proprietorships to Fortune 500 companies;
     the personal property appraisers called on to appraise highly
        visible and valuable items such as gifts given to the First Family
        by foreign dignitaries and a collection of Princess Diana's
        dresses;
     the foremost expert in the field of ``celebrity valuation,''
        which involves appraising the value of a celebrity's brand and
        image along with his or her physical possessions;
     virtually all appraisers accredited in the appraisal of
        machinery and equipment and technical properties; and
     dozens of experts hired to appraise the value of the
        businesses, real property, personal property, machinery and
        equipment, and jewelry destroyed in the September 11 attack on the
        World Trade Center.

             RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
                           FROM DAVID G. WOOD

    Q.1. Do you believe that the Appraisal Subcommittee should have
    rulemaking authority? If so, why is that necessary and what do
    you see as the benefits?

    A.1. During the review that resulted in our May 2003 report on
    the real estate appraisal industry, officials of the Appraisal
    Subcommittee stated that the lack of rulemaking authority, as
    well as limited enforcement powers, made achieving the
    uniformity and standardization, intended by Title IX, more
    difficult.\1\ They further noted that allowing the Subcommittee
    to issue regulations would help ensure greater consistency
    among the States in credentialing appraisers and enforcing the
    most current version of the Uniform Standards of Professional
    Appraiser Practice. However, in commenting on our draft report,
    the Subcommittee stressed that the lack of additional authority
    has not been an impediment to achieving compliance with Title
    XI. Because our study did not encompass making independent
    assessments of compliance, we have no basis to question the
    Subcommittee's comments. However, our analysis of the
    Subcommittee's reports of its periodic field reviews--during
    which Subcommittee staff review the practices and activities of
    each State's appraiser regulatory organization--led us to
    recommend that the Subcommittee develop and apply clear and
    consistent criteria for assessing and reporting on State
    programs.
    ---------------------------------------------------------------------------
        \1\ See U.S. General Accounting Office, Regulatory Programs:
    Opportunities to Enhance Oversight of the Real Estate Appraisal
    Industry, GAO-03-404 (Washington, DC: May 14, 2003).
    ---------------------------------------------------------------------------
        As we noted in our report, giving the Appraisal
    Subcommittee rulemaking authority would change the
    Subcommittee's role under Title XI from a monitoring to a
    regulatory function. This would have significant implications
    that Congress would need to consider. A fundamental question is
    who the Subcommittee would regulate and take enforcement
    actions against. For example, Title XI does not now mandate
    that States establish appraiser licensing or certification
    programs, but rather says that the States ``may'' establish
    such programs. (Obviously, by creating certain requirements for
    federally related transactions within the State, the Title
    gives the States a strong incentive to establish such
    programs.) Authorizing the Subcommittee to regulate and take
    enforcement actions against States could raise Constitutional
    questions.

    Q.2. Do you believe that the Appraisal Subcommittee needs
    enforcement options other than decertification? If so, what
    specific measures would you recommend and why?

    A.2. As noted in the response to question 1 above, officials of
    the Appraisal Subcommittee stated during our review that its
    limited enforcement powers made achieving the uniformity and
    standardization, intended by Title IX, more difficult. However,
    as noted, in commenting on the draft report the Subcommittee
    stressed that it has been able, within the existing statutory
    framework, to achieve compliance with Title XI. The
    Subcommittee further wrote it has been unable to identify other
    powers that would effectively improve its enforcement
    authority. We did not identify evidence indicating that the
    lack of additional enforcement authorities has adversely
    impacted the Appraisal Subcommittee's ability to achieve
    compliance with Title XI.

    Q.3. Mr. Fritts' testimony indicates that half of all
    appraisals originate with mortgage bankers and that Title XI
    does not regulate these appraisals. Do you believe that Title
    XI should be amended to capture appraisals originated by
    mortgage brokers?

    A.3. Title XI was enacted primarily to protect federally
    insured depository institutions from losses and by extension
    the Federal deposit insurance funds. The term ``mortgage
    bankers'' is most often used to describe financial institutions
    that are not federally insured depository institutions.
    Mortgage brokers typically act as middlemen between borrowers
    and lenders; the lenders may or may not be federally insured
    depository institutions.
        Title XI requirements are applicable to all federally
    related transactions entered into by a federally insured
    depository institution, whether or not they involve mortgage
    brokers. As such, the central issue is whether the appraisal
    standards and appraiser qualifications that Title XI requires
    for federally related transactions should be extended to real
    estate mortgage transactions entered into by non-federally
    insured depository institutions.
        GAO has previously identified issues and concerns with
    respect to Federal oversight of non-federally insured mortgage
    lending institutions, most recently in our January 2004 report
    on predatory lending.\2\ However, amending Title XI to cover
    appraisals used in transactions by non-federally insured
    mortgage lending institutions--including their transactions
    involving mortgage brokers--would represent a fundamental shift
    in focus. Title XI would not have strictly the purpose of
    protecting the Federal deposit insurance funds, but rather a
    broader consumer protection aspect. This would likely raise
    additional Federal-State jurisdiction issues, as mortgage
    bankers and brokers are licensed and supervised by the States.
    Such a change would also raise issues of implementation and
    enforcement. Currently, Title XI requirements in effect apply
    to the depository institutions that are federally supervised;
    the requirements are implemented through regulations that the
    five Federal financial institution regulators promulgate and
    enforce. It is unclear who, using what means, would enforce
    requirements among lenders that are not currently supervised by
    Federal regulators.
    ---------------------------------------------------------------------------
        \2\ U.S. General Accounting Office, Consumer Protection: Federal
    and State Agencies Face Challenges in Combating Predatory Lending, GAO-
    04-280 (Washington DC: January 30, 2004).
    ---------------------------------------------------------------------------

             RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
                           FROM CHARLES CLARK

    Q.1. Do you believe that the Appraisal Subcommittee should have
    rulemaking authority? If so, why is that necessary and what do
    you see as benefits?

    A.1. The Board does not believe that the responsibilities of
    the Appraisal Subcommittee as currently outlined in Title XI
    warrant rulemaking authority. Their responsibilities are
    clearly outlined in the law and require no special
    interpretations by rule. Only if Title XI were amended to give
    the ASC final authority over the criteria for appraisers and
    the standards for appraisals would they have need for
    rulemaking authority.
        Further, the Board believes that the ASC has successfully
    discharged its fundamental requirements under Title XI to
    oversee the development of State regulatory programs and the
    creation of the Uniform Standards of Professional Appraisal
    Practice. Thus, Congress should sunset its operations.
        Finally, as the GAO report notes, giving the ASC rulemaking
    authority would convert it from a monitoring agency to a
    regulatory agency. Doing so, could result in court challenges
    to the Federal Government's overstepping the Constitutional
    limits of the Tenth Amendment.

    Q.2. Do you believe that the Appraisal Subcommittee needs
    enforcement options other than decertification? If so, what
    specific measures would you recommend and why?

    A.2. No. As the ASC indicated in its response to the GAG's 2003
    Study, they could identify no other ``powers that would
    effectively improve their enforcement authority.'' We concur.
    Their reviews of State operations and policy of issuing
    statements appear sufficient.

    Q.3. Mr. Fritts' testimony indicate that half of all appraisals
    originate with mortgage bankers and that Title XI does not
    regulate these appraisals. Do you believe that Title XI should
    be amended to capture appraisals originated by mortgage
    brokers?

    A.3. To the extent that a mortgage broker is acting on behalf
    of a lender regulated by a member of the Federal Financial
    Institutions Examination Council, the Georgia Board believes
    that they are
    regulated by the provisions of Title XI. If the mortgage broker
    is working for a lender not regulated by a FFIEC member, then
    the mortgage broker should not be covered by Title XI.

         STATEMENT OF THE NATIONAL ASSOCIATION OF REALTORS'
                                 March 24, 2004
        Mr. Chairman, Members of the Subcommittee, the National Association
    of Realtors' (NAR) appreciates the opportunity to submit
    written testimony regarding the Real Estate Appraisal Industry and
    Title XI of the Financial Institutions Reform, Recovery and Enforcement
    Act of 1989 (FIRREA). NAR is the Nation's largest professional trade
    association with almost a million members and is comprised of over
    1,500 realtor associations and boards at the State and local levels.
    NAR membership includes brokers, salespeople, property managers,
    appraisers, and counselors, as well as others engaged in every aspect
    of the real estate industry.
        NAR commends the Subcommittee for its leadership in recognizing
    that the real estate industry has changed, and also in asserting your
    proper role to examine the effectiveness of the current Federal and
    State regulatory structure as set forth in Title XI of FIRREA. NAR also
    applauds the Subcommittee for highlighting the General Accounting
    Office's (GAO) report on enhancing oversight of the real estate
    appraisal industry. The GAO report points out that Federal, State, and
    private entities face impediments in carrying out essential activities
    called for in Title XI of FIRREA. In addition to impediments, agency
    regulatory officials, mortgage industry representatives, the Department
    of Housing and Urban Development and Government Sponsored Enterprises
    such as Fannie Mae and Freddie Mac all raised concerns about the
    regulatory structure created by Title XI. NAR believes that the current
    regulatory structure is overly complex, inconsistent from State-to-
    State and in need of thorough review and examination by Congress.
    Title XI of FIRREA
    Lack of Consistent Enforcement
        Title XI of FIRREA was enacted to protect Federal financial and
    public policy interests in real estate related transactions by
    requiring that real estate appraisals be performed by individuals with
    demonstrated competency. Since FIRREA was passed 15 years ago, and
    because it mandated State licensing under Federal standards, the
    regulatory structure for appraisers has evolved into a unique and
    complex system. It involves licensing boards in the various States,
    qualification criteria and uniform standards set by the Appraisal
    Foundation, and Federal oversight by the Appraisal Subcommittee of the
    Federal Financial Institutions Examinations Council. State licensing
    boards license, certify and provide oversight and enforcement of
    nationally recognized standards (the Uniform Standards of Professional
    Appraisal Practice) and State laws.
        Since Title XI was enacted, it has been difficult to achieve
    necessary consistency among the States for enforcement of both
    standards and certification requirements. With a patchwork of State
    laws and ineffective Federal oversight allowing for only ``minimum''
    qualifications criteria for licensing and certification in some cases,
    States and the Federal oversight bodies have too often not carried out
    their specific intended responsibility to enforce the standards as
    required by the Federal law. Too often, complaints against real estate
    appraisers in some States are not reviewed by State appraiser boards,
    leading to a lack of disciplinary action against poorly performing
    appraisers. Other boards have been known to spend inordinate time and
    research and collect fines for inconsequential offenses, leaving little
    time for enforcement of major issues.
        The lack of consistent enforcement among the States is due in part
    to the fact that many States do not adequately fund enforcement and
    licensing. As a result, certification boards are forced to choose the
    cases that are investigated based on the nature of the violation, as
    opposed to investigating each complaint thoroughly. Additionally, there
    is no consistent requirement among the States that either appraisers or
    lenders report erroneous appraisals to the State enforcement board.
    Also, some States see the requirement to certify licensing as an
    unfunded Federal mandate, and with many of them facing budget
    restraints it is not difficult to see why there is not uniform
    enforcement.
        Even though adequate funding of the licensing, certification,
    investigation, and disciplinary activities may be a problem in some
    States, it is by no means universal or pervasive. States actually do
    license and certify appraisers and evaluate, approve, and disapprove
    prelicensing educational offerings. States do evaluate, approve, and
    disapprove continuing education course offerings and require regular
    continuing education of their licensees. States receive complaints,
    investigate, and prosecute appraisers for violations of their license
    law and the Uniform Standards of Professional Appraisal Practice
    (USPAP). However, one of the major problems is that States rarely
    receive complaints from the federally regulated lenders, HUD, VA,
    Fannie Mae, and Freddie Mac. These entities too often fail to inform
    States of poor appraisals, poor practitioners, or fail to file
    complaints with the appropriate State-licensing agency or if they do
    so, do it in an incomplete and lackadaisical manner.
    Lack of Qualified Appraisers
        Many State appraisal boards fail to resolve complaints against real
    estate appraisers in an expeditious manner. Whether through a lack of
    resources or a lack of will by those charged with providing oversight,
    the current system allows some unscrupulous and unqualified appraisers
    to continue practicing with little or no recourse for their actions.
        One of the fundamental goals of Title XI was to raise the
    professionalism of appraisers involved in federally related
    transactions, however, this has not been met. Having provided for only
    ``minimum'' qualification requirements, the implementation of FIRREA
    has failed to offer incentives for appraisers to seek additional
    training, education, and experience. We believe the public would be
    better served by a system that encourages appraisers to excel through
    appropriate professional development because many appraisers see
    acquiring a license as the be-all and end-all of becoming an appraiser.
    NAR supports a licensed or certified appraisal for all federally
    related transactions. NAR believes that relying on appraisals more
    often will lead to better loan underwriting. NAR believes that
    appraisals performed by certified and licensed practitioners with
    higher than minimal qualifications will help protect consumers from
    unscrupulous lenders and inflated transactions.
     Lack of Purpose and Direction for the Appraisal Foundation, Appraisal
    Standards Board, Appraisal Qualifications Board, and Appraisal
            Subcommittee
        NAR is concerned about the direction and purpose of the Appraisal
    Foundation, the Foundation's Appraisal Standards Board (ASB), and the
    Foundation's Appraiser Qualifications Board (AQB). NAR questions the
    propriety of a private organization (Appraisal Foundation) promulgating
    standards for appraisals and qualifications of appraisers, which must
    then be adopted and enforced by State regulatory agencies. These
    standards and criteria have the effect of law but they have been
    adopted completely outside the State legislative process. Appointed
    individuals without any type of Government control or oversight have
    the power to promulgate these standards. Even though the standards and
    criteria are issued for public comment, they are nonetheless discussed,
    debated, decided, and mandated by independent and autonomous Boards of
    the Appraisal Foundation in nonpublic meetings. This is in direct
    contradiction to some State laws.
        NAR also questions the lack of responsiveness and accountability
    from the Appraisal Foundation, its ASB, and its AQB to their
    professional association sponsors. There is a significant amount of
    concentrated power given to a relatively small number of individuals
    where the sponsoring organizations have no means of appointing or
    providing oversight. For example, NAR has tried for several years to
    limit the USPAP to ``Appraisal Practice'' by asking that Standards 4
    and 5 be removed from the document because we believe, along with other
    groups, that Title XI pertains to appraisals, not consulting
    assignments. We contend that the mandate to the States in Title XI was
    to license, certify, and regulate appraisers, not counselors.
        In some States, the Appraisal Foundation, the ASB, and the AQB have
    exceeded their authority and have, in effect, acted as regulatory
    bodies over the State regulatory agencies. For example, the AQB has
    previously restricted the licensing authority of some States. They have
    disapproved a number of State-approved prelicensing and continuing
    education courses because of minor technical differences and have
    imposed their own arbitrary criteria.
        The AQB has adopted a number of arbitrary requirements, which could
    be construed as conflicts of interest. For example, the national USPAP
    course mandated by the AQB requires either AQB approval or use of their
    course and examination with royalty paid to the AQB. The national USPAP
    update course and examination has a similar approval structure. Also,
    the AQB requires all USPAP instructors to meet their standards and only
    instructors taking an Instructor Certification Course can meet the
    standards. The only approved Instructor Certification Course is
    presented by the ASB and taught by ASB members.
        The purpose of the Appraisal Subcommittee is to provide control and
    oversight of the Appraisal Foundation, the ASB and AQB, and to protect
    the public, appraisers, and instructors from these conflicts. However,
    the Appraisal Subcommittee often remains silent and thus conveys the
    impression that they are working in concert with the Appraisal
    Foundation and the members of its ASB and AQB. NAR recommends that an
    appeal process to an independent third party be established and courses
    and instructors be approved by either the State Licensing Board or the
    AQB.
        NAR believes that there is a lack of consistent and effective
    oversight of State appraisal boards by the Appraisal Subcommittee.
    Oversight of all State regulatory boards is vested in the Appraisal
    Subcommittee; however, the Appraisal Subcommittee is made up of
    representatives of the lending and banking industry--designees of the
    heads of the Federal financial institutions regulatory agencies. In our
    opinion, the current oversight of the Appraisal regulatory structure is
    more vested toward the lending industry. The problem is that these
    regulatory agencies are the ones that regularly propose and pass rules
    to increase the de minimus level. By increasing the de minimus level,
    they reduce the consumer protections that Title XI of FIRREA was
    intended to provide by requiring appraisals for all federally related
    transactions. As the de minimus level is increased it negates the need
    for an appraisal thus denying protections to the consumer.
    Appraisals and the De Minimus Level
        Over time, most residential real estate transactions have been
    exempt from obtaining an appraisal because the de minimus level, in
    which a certified or licensed appraisal would be required, has been
    raised to $250,000. NAR has had long standing policy that the de
    minimus level for residential property should not exceed $100,000.
    There are a large number of transactions that could avoid the appraisal
    process altogether because the median sales price in many major markets
    and smaller markets is below $250,000.
        NAR recognizes that there are cases when an appraisal for a
    mortgage loan transaction should not be a requirement, but relying
    solely on the dollar amount of the transaction as the determinant is a
    poor measure. There are other factors such as loan-to-value,
    predominant value in the region, qualifications of the borrower,
    strength of the real estate market and its trend that should be
    considered as well.
        Recognizing that the de minimus level in all likelihood will not be
    lowered back to $100,000 for residential loans, NAR believes that
    lenders should be required to inform a borrower of the methods used to
    value a property to determine the amount of the mortgage loan, and that
    borrowers should have the right to be provided with a copy of each
    value estimate or value opinion obtained. Many buyers, particularly
    first-time buyers, are not aware of their options and rights. They do
    not fully understand the purpose of the appraisal or value estimate and
    may not be taking full advantage of the safety, security, and utility
    of an independent, third party opinion of value. NAR firmly believes a
    full appraisal report, prepared by a State-certified or licensed
    appraiser, may be useful to the buyer in assuring them of the validity
    of the price paid for the property and securing the proper amount of
    insurance.
        Further, lenders often obtain multiple estimates or opinions of the
    value of the collateral. In the event that more than one estimate is
    obtained on behalf of the borrower, NAR believes that the consumer
    should be provided with all of the value estimates or opinions of
    value. In this way, the purchaser can be assured that the value
    estimate supports the price of the property.
    Lender Pressure
        There are some participants in the mortgage process that pressure
    appraisers in order to ensure that their estimates of the fair market
    value of collateral property are sufficient to make predetermined loan
    amounts. Increasingly, there is evidence that the use of such pressure
    is widespread in the appraisal field. These pressures are beginning to
    erode the independent judgment of appraisers, and are contributing to
    the ability of unscrupulous individuals to engage in improper loan
    practices, including property flipping and predatory lending schemes.
    While the most immediate victims of these practices are the elderly,
    lower-income families, and other vulnerable consumers, they also damage
    mainstream lenders and Federal housing assistance programs.
    Conclusion
        NAR believes that the oversight of the appraisal regulatory
    structure should be geared toward the interests of consumers and the
    protections the consumer should expect from an independently developed,
    unbiased, objective third party opinion of value of the real property
    offered as security for a loan. The Uniform Standards of Professional
    Appraisal Practice (USPAP) were originally developed by professional
    appraisal organizations to ensure public trust in the appraisal
    profession. We believe the standards should concentrate on their
    original purpose, which is to ensure trust in the appraisal practice.
    Finally, the failure to report faulty appraisal reports and deficient
    appraisers to the appropriate State regulatory boards continues to be a
    serious problem.
        NAR appreciates the opportunity to share its views and observations
    and we stand ready to work with the Subcommittee to improve
    effectiveness of the current Federal and State regulatory structure as
    set forth in Title XI of FIRREA.