Summary: Pennsylvania Case Against AVMs

Pennsylvania Case against AVMs (an Appraiser’s Summary of the Decision)

by Tim Vining





The purpose of this summary is to condense the ruling handed down by Judge Buckwalter.  The ruling is detailed, precise and incorporates many legal references. I have simply extracted portions of Judge Buckwalter’s ruling and restated them below. This case tried in Federal Court is a benchmark ruling and will serve as case law in similar lawsuits. 

I have also taken portions of an article about the case written by Ala Mode on their web page.  That article was written May 25, 2004.  That article more or less interprets the ruling from Ala Mode’s perspective.

The suit was brought by the defendants against the Pennsylvania State Board of Certified Real Estate Appraisers.  The case was decided based the Defendants motion for judgment on the pleadings; Plaintiff’s response thereto contained in Plaintiff’s motion for summary judgment; Defendants’ response in Opposition to Plaintiff’s Motion for Summary Judgment and Plaintiff’s Reply Brief in Further Support of their Motion for Summary Judgment.  What this means is the case was decided on the basis of the plaintiff’s and defendants motions.  Accompanying this summary is the ruling in its entirety written by Judge Ronald L. Buckwalter.

The case revolves around the premise of who has authority for regulating appraisals that are not federally related transactions.  When Congress passed FIRREA, congress put several safeguards in place.  Appraisals conducted in connection with any federally related transaction must be written and performed by “individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision.”  To this end Congress authorized the states to establish state certification and licensing agencies to provide uniform standards for appraisers utilizing certain minimum criteria issued by the Appraiser Qualification Board of the Appraisal Foundation (AQB).  

Pennsylvania licenses real estate appraisers through the Pennsylvania Real Estate Appraisers Certification Act (REACA.  In 1996 REACA was amended closing a loophole that previously allowed real estate brokers to perform appraisals without being a certified appraiser.   This amendment also required all appraisals on Pennsylvania real estate to be performed by persons certified under one of three classes. Therefore, real estate brokers, who were not grandfathered by the 1996 amendment, are not permitted to perform any real estate appraisals without meeting the full certification requirements applicable to all persons seeking to become state certified appraisers.

In September of 2001, Mr. Earl Hertzog a licensed real estate broker completed a market analysis on a property in Bethlehem, Pennsylvania for Chicago Title Market Intelligence (CTMI) Market Intelligence’s corporate predecessor.  Mr. Peter Kovach, prosecuting attorney for the Commonwealth of Pennsylvania Department of State, filed an order to Mr. Hertzog to show cause before the Board of Certified Real Estate Appraisers.  The order alleged that Mr. Hertzog was not state certified to perform real estate appraisals, and that the market analysis he performed in September 2001 constituted an appraisal.  Mr. Hertzog faced a $1,000 civil penalty, if the allegations proved true. During this time CTMI/FNIS also received a cease and desist order from the Commonwealth’s prosecuting attorney that threatened the firms with aiding and abetting the unlicensed practice of appraisals within Pennsylvania if they did not comply with the order.  A consent agreement was entered into between Hertzog and the Commonwealth of Pennsylvania.

The plaintiff argues that FIRREA supercedes Pennsylvania’s authority to regulate appraisals below the De Minimus level. Plaintiffs advance two separate lines of reasoning. First, Plaintiffs argue that Title XI of FIRREA applies to all real estate-related financial transactions by virtue of the express language of its purpose and therefore any attempt by REACA to regulate in this area would impermissibly conflict with FIRREA’s purpose The second line of reasoning the Plaintiffs propound is that there are certain transactions, which involve a federal financial institution, but are exempted from FIRREA’s state certified appraiser requirement and are by definition “non-federally related transactions.”  These transactions are nonetheless regulated by the federal financial institution regulatory agencies and therefore, according to the Plaintiffs, demonstrate that FIRREA’s reach goes beyond federally related transactions and encompasses non-federally related transactions as well. This argument, however, is contrary to the express intent of Congress. Congress drafted the appraisal section of FIRREA with the express intent of protecting federal financial institutions from fraud or incompetence on the part of appraisers. (emphasis mine)

Judge Buckwalter goes into great detail to explain why federal financial institution regulatory agencies have no statutory authority over non-federally related transactions.

Congress likewise was very precise about the authority of the federal financial institution regulatory agencies with regard to federally related transactions in section 3339 of FIRREA. That section requires the regulatory agencies to prescribe appropriate standards for the performance of real estate appraisals in connection with federally related transactions under the jurisdiction of each such agency or instrumentality.  These rules shall at a minimum require (1) That real estate appraisals be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation; and (2) that such appraisals shall be written appraisals. 12 U.S.C. §3339.

Congress further defines a written appraisal as “a written statement used in connection with a federally related transaction that is independently and impartially prepared by a licensed or certified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by presentation and analysis of relevant market information.” (emphasis mine)   Thus, the Plaintiff’s contention that any transaction not requiring the use of a state certified or licensed appraiser is a “non-federally related transaction” is incorrect, because the statute itself simply designates a subset of “federally related” transactions as not requiring state certified appraisers.

For all of these reasons, the Court does not believe that the intent of Congress in drafting FIRREA was to control non-federally related transactions, but instead such transactions were left to the states to regulate.

Judge Buckwalter goes on to state that FIRREA preempts REACA as it applies to all federally related transactions below $250,000. 

For all other exempted transactions, these transactions are non-federally related, and are thus outside the authority of the federal financial institution regulatory agencies.  Therefore, for these transactions, REACA is not preempted

Plaintiffs next argue that REACA’s certified appraiser requirement is explicitly preempted for Federal Savings Associations by an OTS regulation, implementing the Home Owner’s Loan Act (HOLA). 

Judge Buckwalter goes into detailed explanation and concludes his opinion on this argument stating “REACA does not specifically target the operations of national banks and federal savings associations. In fact, neither mortgages, loans, banks, nor savings associations are even mentioned in REACA.  At best, REACA’s affect on national banks and savings associations is the same as a state requirement that persons doing home inspections be licensed.  Neither law requires that every real estate transaction use the regulated service, but if it is used, it must be done by a licensed person.  For the foregoing reasons, the court finds that neither HOLA nor NBA preempt Pennsylvania’s real estate appraisal regulations.

Plaintiffs next argue that national banks powers to make real estate loans are significantly impaired.   Plaintiffs provided a sworn declaration made by Ray Ferrarin, Executive Vice-President of Valuations Services of Fidelity National Information Solutions, Inc. That states that certified appraisals take “5 – 10 business days or more” at a cost of $325 for a full appraisal, $210 for a drive-by appraisal. The nonconforming valuations, done primarily using automated data not provided by a board certified appraiser may be done in seconds, and for these valuations FNIS charges between $25 and $100.  Mr. Ferrain’s declaration loses much of its credibility when it provides a cost comparison between Non-Conforming Valuations and appraisals done in conformity with REACA.  First Mr. Ferrarin does not disclose the number of non-conforming valuations done of Pennsylvania real estate, but instead, provides a dollar figure of $420,000. He then states that “the corresponding charge would have been approximately $4,490,000 if half of these non-conforming valuations had been drive-by appraisals and half had been full appraisals, and the charge would have been approximately $5,460,000 if all of these Nonconforming appraisals had been full appraisals.”  Instead of using actual figures, Mr. Ferrarin clearly guesstimated, using the number of assumptions most favorable to his case.

In addition, Plaintiffs’ contention that the delay and extra expense caused by requiring property valuations to be performed by a certified appraiser constitutes a significant impairment of the mortgage lending process is unavailing.  First and foremost, this argument fails because Congress itself recognized the value of such appraisals when it required them for federally related transactions under FIRREA.  The main thrust of FIRREA is that the requirement that appraisals be done by state certified or licensed appraisers is necessary to protect “the safety and soundness of financial institutions.”

Plaintiffs failed to provide any evidence, other than mere speculation, that the increased cost would have or has had any impact whatsoever on national banks and federal savings association’s ability to make mortgage loans.  Appraisal fees are typically borne by the consumer.  Also, such fees whether $25 or $325 are relatively insignificant when compared to either the average total amount of closing costs of $4,659.34 or the total price of the real estate.  Furthermore, Plaintiffs have provided no evidence that requiring certified appraisers to perform all appraisals on non-federally related real estate transactions in Pennsylvania has or will have any negative effect on the mortgage loan market.  Plaintiffs have not provided one example or instance of a consumer not taking a mortgage loan on real estate because the appraisal fee was $325 versus $25.  The data collected by the regulatory agencies, during their rulemaking on this issue, specks to a different issue entirely.  There, the regulatory agencies consider countrywide whether a threshold level or other appraisal exemption will affect the health regulated financial institutions.  Some of the issues cited by the boards, such as premiums paid by small town lending institutions to bring an appraiser to the area, simply do not apply, when a state requires every real estate appraisal to be performed by a certified appraiser.   Another concern expressed by the regulatory agencies is that there is an uneven playing field between regulated and non-regulated financial institutions. REACA actually solves the problem by requiring all appraisals done, regardless of the type of transaction, to be completed by certified or licensed appraisers.  For these reasons the court finds that the Plaintiffs have failed to make a showing that REACA significantly impairs the lending powers of national banks.

REACA’s self-evident purpose is to ensure appraisals conducted in the Commonwealth of Pennsylvania are conducted by qualified and well-trained persons, to avoid the problems of over-inflated, erroneous or sometimes intentionally dishonest real estate appraisals.  Ensuring the stability of the Commonwealth’s real estate market, as well as the financial institutions is a substantial state interest.  In addition, the manner in which the Commonwealth seeks to regulate this speech, by establishing a licensing and certification process, is also reasonably tailored to fulfill its purpose.  “The power of the State to license lawyers, psychiatrists, and public school teachers—all of whom speak for a living—is unquestioned.” Likewise, licensing real estate appraisers is reasonable and unquestionably permissible under the First Amendment.  Plaintiffs have provided no other valid grounds upon which a First Amendment challenge to REACA might be sustained.

Accordingly, the Court DENIES Defendants Motion for Judgment on ripeness and lack of justiciability grounds, and GRANTS the Motion with respect to Count One of Plaintiffs’ Second Amended Complaint in so far as it argues that FIRREA is exclusively directed toward regulation of federally related transactions, and non-federally related transactions fall outside FIRREA’s scope are subject to regulation by the states.  The federal financial regulatory agencies, pursuant to the Congressional authority granted under 12 U.S.C. § 3341(b), have exempted federally related real estate transactions under $250,000 from the state certified real estate appraiser requirement.  Insofar as these federally related, but expressly exempt transactions are concerned, REACA is preempted by FIRREA.  For all other transactions that are non-federally related either because they do not involve a federal financial institution regulatory agency or the Resolution Trust Corporation, or because they have been designated by the federal financial institution regulatory agencies as not requiring “the services of an appraiser” as set forth in 12 U.S.C. § 3350(4), such non-federally related transactions are outside the scope of FIRREA and are subject to state regulation. Defendants’ Motion for Judgment on the Pleadings is GRANTED with respect to Counts Two and Three because neither Federal Reserve Act, 12 U.S.C. § 371(a), the National Bank Act, 12 U.S.C. § 24(seventh) and 12 C.F.R. § 7.4001(a), nor the federal Home Owner’s Loan Act, 12 U.S.C. § 1464(c) and 12 C.F.R. § 560 preclude the states from regulating appraisers or the appraisal process, these statutes and their implementing regulations preclude direct or significant interference with national banks and federal savings associations.  Defendants’ Motion for Judgment on the Pleadings is GRANTED with regard to Counts Four and Five because Plaintiffs conceded these by not briefing these issues in their response to Defendant’s motion.  Defendants’ Motion for Judgment on the Pleadings is GRANTED as to Count six, because as explained in detail above REACA does not burden or interfere with interstate commerce.  Defendants’ Motion for Judgment on the Pleadings is GRANTED as to Count Seven, because insofar as it regulates speech, REACA is a reasonable regulation of commercial speech permitted under the First Amendment.  Defendants’ Motion for Judgment on the Pleadings is GRANTED as to Count Eight as the Court finds there was no misconduct on the part of the Defendants that would sustain a claim under section 1983 of the Civil Rights Act.

With respect to Plaintiffs’ Motion for Summary Judgment, the Court DENIES summary judgment for the reasons stated above on Counts two through Seven (emphasis mine) Partial Summary Judgment is GRANTED on Count One in that FIRREA preempts REACA with regard to federally related transactions below the $250,000 threshold set by federal financial regulatory agencies pursuant to the authority granted in 12 U.S.C. § 3341 (b). As stated above, for all other non-federally related transactions, including those exempted by the federal financial institution regulatory agencies, FIRREA does not extend to them, and state regulations, including REACA, apply.

A La Mode, Inc in their May 25, 2004, newsletter profiled this case.  Some highlights of A la Mode’s comments.

In truth the opinion is a landmark victory for the Pennsylvania Board of Certified Real Estate Appraisers (Board) and appraisers everywhere.

Highlighting Judge Ronald L. Buckwalter’s opinion:
1.  FIRREA applies only to “federally-related” real estate transactions—essentially, transactions involving a federally regulated lending institution.
2.  FIRREA empowers federal regulators to determine when the services of an appraiser are not required;
3.  When federal regulators determine that an appraiser’s services are not required in a federally related transaction, it removes those types of activities from FIRREA altogether, and state regulation is allowed; but
4.  When regulators established the (now) $250,000 de minimus, or the transaction amount under which no appraisal would be required, it specifically did not remove transactions from the federal law’s reach simply because of the transaction amount.

The ruling amounts to this: FIRREA applies only to federally related transactions.  A transaction does not cease to be federally regulated merely because the transaction amount in under the de minimus. However, in every other case where regulators determine that the services of an appraiser are not required, it opens the door to state regulation of the type Pennsylvania enacted.

In other words, the Board in Pennsylvania was well within its rights to require an appraiser in pre-sale portfolio asset reviews.

The court was addressing the particular contention of FNIS in the case that FIRREA applies to all real estate transactions, and where Congress or the regulatory agencies determine that an appraisal is not required, states may not step in and require an appraiser be used.  The Court’s ruling clearly repudiates that argument.  No state may require an appraisal in a federally related transaction under the de minimus amount, but as to any other exemption from FIRREA, states are free to regulate.

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