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Appraisal Regulatory Modernization: Idea Whose Time Has Come
By Stephen S. Wagner, MAI, SRA, AI-GRS
A home purchase is one of the most important lifetime investments anyone can undertake. For most Americans, it’s the single biggest purchase they will ever make. Appraisals serve an important role in that purchase: they safeguard the fairness of home buying and selling. Appraisals conducted by highly trained and skilled professionals with knowledge of the local area are the very best protection for consumers and lenders. Without independent and qualified appraisers, home-secured lending poses significant risks to everyone involved in a real estate transaction.
Real estate appraisers are critical guardians of their client’s interests. They are uniquely qualified to protect those financial interests by providing a credible, reliable opinion of value. Appraisers are independent third parties who perform a service for a fee rather than for a commission contingent on the determined value, the approval of a loan or the eventual sale of the property.
However, appraisers are being weighed down by a stack of growing and outdated rules and regulations. An antiquated regulatory structure and layers of federal rules and regulations add costs and a false sense of added protection that is duplicative and unnecessary.
This aging and growing regulatory structure, in place for nearly 30 years, is unlike any other in the federal system. There is no comparable system of federal regulation or oversight found within other real estate or finance industries. In fact, the two most prominent parties that engage with homebuyers—real estate agents and mortgage originators—do not have federal oversight of their licensing functions. Many aspects of federal oversight of the valuation profession’s regulatory structure have remained static and out of touch while redundant red tape has been added. Finance mortgage methods have changed, and alternative valuation methods are more advanced than ever.
Additionally, appraisers are inundated with unnecessary standards and training requirements. The federal government is unnecessarily playing “big brother” over the states when state regulatory agencies could function just fine on their own with a federal backstop authority to ensure states continue to meet minimum requirements. This places states in the very unusual position of being audited by a federal agency, which is unique in federal statute.
Outdated and burdensome regulations have created a layering effect of rules and regulations, including:
• Background checks without a federal mandate,
• Unappealing supervisor-appraiser and trainee-appraiser requirements,
• Imposition of license renewal fees,
• Extensive course requirements, and
• Expensive mandates to purchase rules and regulations
The structure impedes innovation and can place appraisers at a disadvantage with competitors in other professions, such as accountants and attorneys. The bureaucracy created has imposed unnecessary costs throughout the system. Additionally, appraisers are given little flexibility as to how they best can perform appraisals in service of their clients.
Impact on Appraisers
All this over-regulation results in negative effects on appraisers. Suffocating regulation is causing more and more appraisers—the majority of whom are small business owners—to re-consider staying in the field…and discourages others from joining.
Predictive analytics for the next five to 10 years suggest there will be even fewer appraisers due to factors such as retirement, fewer new people entering the profession, economic factors and government regulation. In fact, excessive regulation, insufficient compensation and increasing costs—all of which are related to over-regulation—are the biggest reasons appraisers cite for not wanting to stay in the field for more than five years, according to a 2017 survey of appraisers conducted by the National Association of Realtors.
This affects not just residential and commercial real estate appraisers engaged in mortgage work, but also those practicing in areas such as development consulting, litigation, tax and financial reporting services, and other valuation services.
Appraisers are being choked by rules and regulations in nearly every facet of their business. Their professional lives have become extremely complicated, more expensive and less productive due to a dated and archaic regulatory structure: from how an appraiser reports an appraisal, to the supervision of trainees, uneven licensing requirements, licensing and registration fees passed down by clients, mandates from federal agencies and additional client-imposed assignment conditions.
As a result, consumers and the real estate professionals who work with appraisers suffer from increased turnaround time, delays in loans and potential higher costs.
The Appraisal Institute’s Role
As the nation’s largest professional association of real estate appraisers, the Appraisal Institute (AI), is one of several organizations calling for appraisal regulatory modernization. Calls for reform are coming from many sectors of the real estate and finance industries, including real estate brokers, lenders, home builders and other appraiser organizations. The AI has led dozens of groups in calling on Congress to hold hearings to review the federal regulatory structure for real estate appraisal including:
• the current appraisal regulatory framework;
• appraisal information systems;
• impact of recent regulatory reforms on the valuation profession; and
• availability of qualified appraisers, particularly in rural areas.
The AI also testified before Congress on the need for appraisal regulatory reform. In encouraging reform, the AI represents the good of everyone in the valuation profession—whether they belong to the Appraisal Institute or not—and, in turn, serves the public trust.
The Appraisal Institute is focused on three primary areas where regulatory modernization is needed:
1. Modernize appraisal oversight.
Appraisal regulation should be aligned along the lines of regulatory structures in other industries, such as insurance and mortgage origination, recently enacted by Congress. Those structures maintain state licensing authorities but set up more efficient licensing application and renewal processes. Any solution also should explore a nationwide platform, or portal, for appraisal practitioners, users of appraisal services, and state regulators to use to process license applications and renewals, thus eliminating redundancies and “red tape.”
2. Improve enforcement.
Streamlined regulation should provide clear audit processes for state appraiser regulatory agencies, allowing state regulators to focus on licensing administration and enforcement. Also, modernized regulations should improve information-sharing among state regulatory agencies through a common platform.
3. Enhance appraisal quality.
Financial institutions should be authorized and encouraged to “raise the bar” when hiring real estate appraisers, utilizing professional appraisal designations that exceed minimum licensing requirements when procuring appraisal services.
The NMLS Model
Among specific suggestions the Appraisal Institute has made to Congress is the realignment of the appraisal regulatory structure like those of other professions in the real estate and mortgage industries.
One system that the Appraisal Institute has proposed as a model is the National Mortgage Licensing System, which is a cooperative among state agencies overseen as a last resort by the Consumer Financial Protection Bureau. Realigning the appraisal regulatory system with the NMLS would provide a common system in which appraisers and appraisal management companies could submit applications for licensure in multiple states.
An NMLS-type structure would maximize efficiency through improved coordination among state regulators, lower regulatory and cost burdens, and benefit appraisers and users of appraisal services.
If Congress were to adopt an NMLS-like structure, it would improve coordination with a simplified flow of information through a single stop to access data and a uniform database for appraisers across states. For example, many states now require background checks for appraisers—who often work in more than one state—without a central processing or management system, which forces appraisers to navigate a patchwork process that increases costs for lenders and consumers. Meanwhile, the NMLS has a single background check that can be used by all states, providing one-stop shopping for practitioners and appraisal firms.
A recent report from the U.S. Department of Treasury recommended updating the 1989 Financial Institutions Reform, Recovery and Enforcement Act, while pointing out the obvious benefits of systems like the NMLS for harmonizing state licensing laws in the financial services industry. The report recognizes the benefits of the NMLS for other professions, which has been “to reduce duplicative regulatory requirements, promote greater information sharing and coordination, and maintain consumer protections and the strength and resilience of regulated firms.” It recommends efforts to build a more unified licensing structure and supervisory system across the states, which would also reduce inconsistencies across state laws and regulations.
Ultimately, consideration must be given to the impact on consumers, who are making the most important purchase of their lives, and whether proposed changes improve safeguards or increase risks.
About the Author
Stephen S. Wagner, MAI, SRA, AI-GRS, of West Lafayette, Indiana, is the 2019 president of the Chicago-based Appraisal Institute, the nation’s largest professional association of real estate appraisers with more than 18,000 professionals in nearly 50 countries. He is a senior appraiser with Terzo & Bologna, Inc., in Indianapolis.
Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over
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