[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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
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    \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.
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    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.
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    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.
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    \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.
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    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.
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    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.
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    \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.
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