Tuesday, August 17, 2010

H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act

My world was much different in the late 1980’s. Although I had been in the real estate and appraisal profession for a decade, political activity did not interest me. Here at Gregoire & Gregoire, we had been using a networked mini-computer for appraisal reporting since 1983, but I did not have an email account or address. I did not surf the web. Our clients were savings and loan associations, FHA lenders, loan discount companies (purchasers of privately originated first and second mortgages), real estate brokers, and several lawyers. All our research was completed through examination of paper and microfiche records. We went through Polaroid SX-70 film packs by the case and always kept a spare camera or two in the back seat or trunk of the car. Life was good. A career in the appraisal profession, at least here in the Sunshine State, was one coveted by many.

In-person networking with other appraisers was a regular activity, and usually accomplished at the monthly meetings of the local chapter of the Society of Real Estate Appraisers. My memory may be a little foggy, but I do remember sitting down with a few appraiser friends after a Society meeting to discuss the pending implementation of Title XI of the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). Unlike most of my peers, I was not enthused or optimistic about the new law. It was difficult to see any upside for me or the profession by involving the federal government in appraisal regulation. I lost the argument with my friends, shouted down with comments about “professionalism” and “national standards”.

About 20 years after that discussion, technology has influenced many of the actions involved in the research, development and reporting of appraisals. Our ability and means to research and communicate has improved exponentially, and personally, my interest in regulation, government, and politics has become an obsession. The nature of some folks within the sphere of real property, loan origination, lending and banking is, unfortunately, just as it was. A mere 25 or so years after the disintegration of the savings and loans that prompted FIRREA, the country finds itself in the midst of an even worse financial mess. In response to crisis, and true to form, Congress has once again sprung into action to save us all. Their solution is H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.



Appraiser associations, individual appraisers, real estate associations, real estate brokers and BANKERS had seats at the table when Subtitle F, the Appraisal Activities section of the Dodd – Frank bill, was crafted. Using 21st century technology, following the progress of the bill, communication with my elected representatives, the House and Senate Committees, and the Conference Committee was a regular event once the Senate took it up. It seems as though everyone got a little piece added here and there. Some interest groups won and some lost. How did appraisers fare? Based on my read of the legislation, these are the provisions with the most impact on appraisers and the profession:

  • Appraiser independence standards have been added to the Truth in Lending Act (TILA)
  • Conflicts of interest are defined and prohibited on the part of appraisers and appraisal management companies (AMCs)
  • Reporting of appraiser violations of the Uniform Standards of Professional Appraisal Practice (USPAP) by persons involved in real estate transactions is mandated
  • Regulations facilitating appraisal portability will be issued
  • Customary and reasonable fees for appraisers mentioned
  • Sunset of Home Valuation Code of Conduct (HVCC)
  • The deminimus must be agreed to by Bureau of Consumer Financial Protection
  • State registration of AMCs required
    • AMCs owned and controlled by financial institutions exempt from state registration
  • Minimum requirements established for AMCs
  • Appraisal Subcommittee (ASC) will maintain national registry of appraiser management companies and collect registry fee from states
  • ASC can increase appraiser registry fee collected from states
  • ASC gains ability to make grants to state appraiser regulatory agencies
  • ASC may impose sanctions, short of non-recognition, against states
  • Office of Thrift Supervision is axed from the ASC and Federal Housing Finance Agency and Bureau of Consumer Financial Protection added
  • Appraiser Qualifications Board (AQB) gets new charge
    • Establish requirements for Trainee Appraiser
    • Establish requirements for Supervisory Appraiser
    • States are required to comply with AQB requirements for Licensed Appraisers
  • Automated Valuation Models (AVMs) must comply with quality control standards
  • Restriction on use of Broker Price Opinions (BPO) for loan origination created
  • Borrowers entitled to copies of all appraisals and valuations
  • Government Accountability Office (GAO) Study of the Whole Ball of Wax
There’s not enough space to comment on each and every section, but here are a few thoughts:

All the appraisal related modifications made to the TILA call for “Rules, Interpretative Guidelines, and General Statements of Policy” to be issued by the Board of the FED, Comptroller of the Currency, National Credit Union Administration Board, Federal Housing Finance Agency and the new Bureau of Consumer Financial Protection. Interim regulations will be prescribed by the Board of the FED. Even reading between the lines, I can’t find any appraisal related agency in that group. As is the Appraisal Subcommittee, it’s dominated by banking regulators.

Modifications to the TILA include the appraisal independence standards, portability of appraisals, customary and reasonable appraisal fees and sunset of the HVCC. Although it may appear as though appraisers will benefit from this section of the new law, it’s a bit early to get our hopes up. In all likelihood, the new rules for selection and retention of appraisers will look much like the HVCC. Although customary and reasonable fees are required, by my reading, the amendments do not provide for a clear enforcement mechanism, other than the banking agencies. Personally, there is discomfort with any agency of the federal government, especially a federal banking agency, passing judgment on the reasonableness of my professional fees. The groups charged with the task of ensuring appraisal portability do not have an appraiser’s understanding of Client, Intended User of Intended Use. Although there may not be mandatory requirements imposed on appraisers, it will be no surprise if fee appraisers end up obliged to furnish copies of reports to more than one loan originator to facilitate their idea of portability.

The TILA amendments seem to be generating the most buzz in the appraisal community, but the amendments to FIRREA will have a much more serious and severe impact on appraisers and the profession. These changes will cost appraisers money, impose new requirements and may have significant detrimental effects on our businesses.

A new requirement requires AMCs to be registered with the states. Those states, possessions and territories not regulating AMCs must establish a program within about 3 years. Although many states have already adopted such legislation, the federal banking agencies, along with the new Bureau of Consumer Financial Protection will establish the minimum requirements for the state AMC registration programs, and inform the states of the “correct” means of corralling the activities of these brokers of valuation services; AMCs. Of course, the huge AMCs owned and operated by financial institutions already regulated by one of the banking agencies are exempt from state registration.

Do you see a pattern? Was the Dodd-Frank Wall Street Reform and Consumer Protection Act designed to protect consumers and appraisers, or was it crafted to concentrate power, influence and control with another group?

All AMCs will pay a registry fee and be included in an ASC registry. Although some AMCs are not required to register with states (those owned and controlled by the banks), it appears states are responsible for collecting the fees to be remitted to the Appraisal Subcommittee. These fees will be based upon the number of appraisers contracting with the AMC, and are subject to an ASC imposed minimum amount. There may be cheer erupting from the appraiser community on this point of the law, but you should expect the AMC registry cost to be passed on to their contract fee appraisers and be cited as a reason to limit the size of a particular AMCs panel. In fact, several AMCs are already informing appraisers that their end of the appraisal fee will be reduced by $25 - $50. The excuse is the ASC registry fee.

Of course, Congress did not pass up an opportunity to raise the registry fees for appraisers either. The stated annual maximum increases from $25.00 to $40.00 a year, and could increase to as high as $80.00 with the approval of the Federal Financial Institutions Examination Council (FFIEC - another group of banking regulatory agency chiefs).

With a 60% increase in the registry fee, where will all the extra money go? In a classic transfer of wealth scheme, the Appraisal Subcommittee gains the ability to make grants to state appraiser regulatory agencies to assist in their enforcement efforts. It would be a surprise if states with effective appraiser regulatory programs will receive grants. In other words, successful programs will subsidize ineffective systems.

Of course, the registry fee tax on appraisers funds the operation of the ASC, but it is also distributed The Appraisal Foundation, the ASB and the AQB in the form or grants. In fact, since 1989, the ASC has disbursed over $12,500,000 to The Appraisal Foundation. Over $2,750,000 of that was transferred to The Appraisal Foundation over 2008 – 2009. Given the fact the ASB and the AQB have new charges as a result of the Dodd-Frank amendments to FIRREA, count on The Appraisal Foundation being first in line with a request for a substantial grant.

Real Property Appraiser Qualification Criteria, developed by the AQB, has already been adopted for Licensed Appraisers and Trainee Appraisers. The AQB will need a grant to create minimum qualification requirements for Supervisory Appraisers. Get ready for exposure drafts, comments on exposure drafts, even more exposure drafts and, an eventual edict from the AQB concerning Supervisory Appraisers. Sure, the members of the AQB are honorable people and will likely produce Qualification Criteria that many consider to be reasonable. My concern is that the AQB is the final authority; the board operates autonomously, and there is no regulatory body designated as authorized to hear an appeal of their decrees.

The ASB is given the task of consulting with The FED, Comptroller of the Currency, National Credit Union Administration Board, Federal Housing Finance Agency, the new Bureau of Consumer Financial Protection and the staff of the ASC to develop regulations and quality control standards for AVMs. Of course, a grant from the ASC to the ASB is likely. My take on the Dodd – Frank language is that it opens up the possibility for increased use of AVMs for mortgage lending purposes. Keep in mind the entities involved in crafting rules and regulations and cross your fingers if you believe their decisions will be made with a tilt in favor of the appraisal profession.

Although The Appraisal Foundation was created through the efforts of professional appraiser associations for the advancement of professional valuation, it can be argued the organization has morphed into something never imagined by the original sponsoring organizations. The Appraisal Foundation Advisory Council (TAFAC) and the Industry Advisory Council (IAC) are dominated by non-appraisal organizations, many of which are involved in banking, lending, and appraiser panel management. As a result, some have suggested, decisions made by The Foundation and its independent boards tilt more to the interests of users of professional appraisal services than to the appraisers that pay the freight and are bound by the standards. That determination; I’ll leave it to you.

One encouraging aspect of the Dodd – Frank Wall Street Reform and Consumer Protection Act is an amendment to Section 1104(b) of FIRREA. The change will require the ASC to meet in public session after notice is given. Unfortunately, The Appraisal Foundation, ASB and AQB escape obedience to the same open meeting standard. Sure, the ASB and AQB hold some meetings in public, their important discussion is accomplished behind closed doors. It’s probably fair to say that any resolution adopted by either the ASB or AQB in a public meeting is a mere confirmation of a decision debated and decided in secret, behind closed doors. In this day and age, there is no credible reason for surreptitious deliberation of appraisal standards and appraiser qualifications. Regulatory boards, government agencies and tribunals all over the country routinely conduct all their business in the sunshine. Even if these boards are making sound decisions, their furtiveness encourages suspicion, especially among those subject to the regulations.

Clearly, I am not among the appraisers jumping for joy and singing the praises of the Dodd – Frank bill. It would not surprise me if, just as in 1989, I am in the minority holding that opinion.

In preparation for recognition of the 15th anniversary of FIRREA, I was asked my thoughts. Here’s what I said in August, 2004:


“In my humble opinion, at least in my part of the country on the residential side, the result of increased regulation and federal oversight has contributed to an oversupply of minimally qualified appraisers, the diminishment of quality education and the unfortunate loss in prestige of several professional associations."

"Fifteen years after FIRREA, it seems as though appraisers are held in lower esteem, their opinions and services are often regarded as unnecessary, burdensome and impediments to commerce, and a higher percentage of our ranks are occupied by individuals hell bent on developing one 'skill' — filling a form with canned comments."

My views of federal interference in appraiser regulation will change when it’s demonstrated that the amendments in the Dodd – Frank Bill address the damage to the appraisal profession, and to the public trust of it, caused by FIRREA.

NOTE: Although I maintain membership is several professional associations, the views expressed are my own, and do not reflect the policy or position of any organization.

UPDATE: Text and Title changed to correct the bill number - sheesh!

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