Regulatory Programs: Opportunities to Enhance Oversight of the	 
Real Estate Appraisal Industry (24-MAR-04, GAO-04-580T).	 
                                                                 
The appraisal and mortgage lending industry has changed 	 
dramatically since the passage of Title XI of the Financial	 
Institutions Reform, Recovery, and Enforcement Act of 1989. Some 
have concluded that the problems Title XI was intended to	 
address--the risk to the federal deposit insurance funds and the 
lack of uniform standards and qualifications--no longer exist.	 
This statement is based on GAO's May 14, 2003, report and	 
discusses the roles of private, state, and federal entities that 
oversee the appraisal industry; the challenges that Title XI	 
presented to these entities; and industry participants' concerns 
about the effectiveness of the Title XI regulatory structure.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-580T					        
    ACCNO:   A09571						        
  TITLE:     Regulatory Programs: Opportunities to Enhance Oversight  
of the Real Estate Appraisal Industry				 
     DATE:   03/24/2004 
  SUBJECT:   Appraisals 					 
	     Federal regulations				 
	     Federal/state relations				 
	     Financial institutions				 
	     Mortgage loans					 
	     Real property acquisition				 
	     Standards and standardization			 
	     State-administered programs			 
	     Private sector					 

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GAO-04-580T

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Housing and Transportation, Committee on
Banking, Housing, and Urban Affairs, U.S. Senate

For Release on Delivery

Expected at 2:30 p.m. EST REGULATORY PROGRAMS

Wednesday, March 24, 2004

    Opportunities to Enhance Oversight of the Real Estate Appraisal Industry

Statement of David G. Wood, Director Financial Markets and Community Investment

GAO-04-580T

Highlights of GAO-04-580T, a testimony before the Subcommittee on Housing
and Transportation, Committee on Banking, Housing, and Urban Affairs, U.S.
Senate

The appraisal and mortgage lending industry has changed dramatically since
the passage of Title XI of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989. Some have concluded that the problems Title
XI was intended to address-the risk to the federal deposit insurance funds
and the lack of uniform standards and qualifications-no longer exist. This
statement is based on GAO's May 14, 2003, report and discusses the roles
of private, state, and federal entities that oversee the appraisal
industry; the challenges that Title XI presented to these entities; and
industry participants' concerns about the effectiveness of the Title XI
regulatory structure.

In its report, GAO suggested that, among other things, the Chairman of the
Appraisal Subcommittee should:

o  	develop and apply consistent criteria for determining and reporting
states' compliance levels with Title XI;

o  	explore potential options for assisting states in carrying out their
Title XI activities, particularly for investigating appraiser complaints;
and

o  	explore alternatives for providing future Title XI grant funding to
the Appraisal Foundation and its two boards.

The Appraisal Subcommittee generally agreed with our recommendations and
has taken actions to address them.

www.gao.gov/cgi-bin/getrpt? GAO04-580T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at
202-512-8678 or [email protected].

March 24, 2004

REGULATORY PROGRAMS

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 under the Appraisal Foundation establish uniform rules
for real estate appraisals and set minimum criteria for certifying
appraisers. State regulatory agencies certify appraisers based on these
criteria. In addition, states (1) implement licensing of real estate
appraisers and (2) monitor and supervise compliance with appraisal
standards and requirements. The federal financial regulators oversee
financial institutions' use of appraisals, and a federal agency, the
Appraisal Subcommittee, monitors the functions of the entities. As part of
its oversight activities, the Appraisal Subcommittee performs field
reviews of the state appraiser regulatory agencies. GAO found that these
reviews and their resulting reports could be more useful if based on clear
and consistent criteria for assessing states' compliance with Title XI
requirements.

All of these entities except the federal financial regulators identified
potential impediments to carrying out their Title XI responsibilities. The
two private entities stated that fund limitations could impede their
ability to ensure that development of standards and qualifications evolve
with changing conditions. State agencies said that funding shortfalls
hindered their ability to enforce compliance. Appraisal Subcommittee staff
reported that rule-making authority and additional enforcement sanctions
could facilitate its oversight of state compliance with Title XI. The lack
of funding and resources cited by state appraiser regulatory agencies and
the two private entities, which establish appraisal standards and
appraiser qualification criteria, could affect their future ability to
fulfill their Title XI responsibilities. At the same time, the Appraisal
Subcommittee has accumulated an operating surplus of almost $4 million
from fees levied and collected by the states on behalf of the federal
government.

Industry participants raised concerns about aspects of the Title XI
regulatory system for appraisers. They cited differences in state
regulation that affect both lenders and appraisers, gaps in Title XI's
coverage-for example, transactions of less than $250,000 do not require an
appraisal, high fees and burdensome processes for having appraiser
education courses approved, and weak enforcement and complaints
processing. Some industry participants felt that states, traditionally
involved in regulating professions, should solely regulate the appraisal
industry. Others felt that the current structure needed a significant
overhaul to become effective. GAO found no clear consensus among the state
regulatory agencies it surveyed or other industry participants regarding
the need for or impact of possible changes to the Title XI regulatory
structure.

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 1980s, 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

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 (GSEs) that establish standards for appraisals associated with
mortgages they purchase; the Department of Housing and Urban Development
(HUD), which establishes appraisal requirements for its

1U.S. General Accounting Office, Regulatory Programs: Opportunities to
Enhance Oversight of the Real Estate Appraisal Industry, GAO-03-404
(Washington, D.C.: May 14, 2003).

2As 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.

3The 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.

insured mortgages; trade groups representing appraisers and mortgage
lenders; appraiser education providers; and academic experts.

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.

o  	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.

o  	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.

o  	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.

o  	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
XIrelated 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 rule-making 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 GSEs 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.

  Title XI Created a Complex Oversight Structure

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.

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

4The 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.

developing appraisals and the information the appraisal report must
contain.

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

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.

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
institutionaffiliated parties such as appraisers.

5Although the states are responsible for establishing and administering
licensing qualifications, Title XI authorizes the federal financial
institution regulators to establish additional qualification criteria.

6For 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, D.C.: May 23,
1994). In addition, the federal financial institution regulators issued
Interagency Appraisal and Evaluation Guidelines on October 27, 1994.

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

Among other things, the subcommittee is responsible for:

o  	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 that the requested funds will only be used for activities related
to Title XI.

o  	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

7The 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.

8Title 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.

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.

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.

o  	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.

o  	Maintaining a national registry of state-licensed and state-certified
appraisers who may perform appraisals in connection with federally related
transactions.

9Illegal 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.

  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 rule-making 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.

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.

States Cited Funding Limitations and Frequent USPAP Updates as Impediments

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 Rule-Making Authority and Enforcement
Options Could Facilitate Its Oversight of States

According to subcommittee officials, the lack of rule-making 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 rule-making 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 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.

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.

  Industry Participants Raised Various Concerns about the Title XI Oversight
  Structure

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.

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

10Fannie 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.

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 educationrelated 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.

11The 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:

o  	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.

o  	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

  Contacts and Acknowledgments

(250193)

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.

For further information on this testimony, please contact David G. Wood at
(202) 512-8678, or Harry Medina at (415) 904-2000. Individuals making key
contributions to this testimony included Alexandra Martin-Arseneau and
Paul Thompson.

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