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Appraisal Reform

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[ This material is for discussion purposes only and has not been approved by the Transactions and Regulatory Committee, the Legislative or Executive Committees or the Board of Directors]

The Question: Should C.A.R. SPONSOR legislation to empower the Office of Real Estate Appraisers (OREA) to regulate Appraisal Management Companies so as to prevent "geographic incompetence" of appraisers assigned out of their normal work area?

Action: Optional; no action required

1. Sponsor legislation to empower OREA to regulate AMCs to avoid out of area appraiser violations.
2. Support legislation of others that increases supervision of appraisers.
3. Other
4. Do Nothing

Discussion: Concerns have been raised in recent years that the trend toward concentration of appraisal business in appraisal management companies (AMCs) has degraded the quality of appraisals and interfered with the ability to close legitimate transactions. The explosive growth of AMCs came from the demand from financial regulators that lenders insulate mortgage loan originators (loan officers and loan brokers) from contact with, and control over, appraisers. Lenders responded by "making lemons into lemonade" by eliminating their in-house appraisal departments and contract appraisers, and moving the appraisers out to an AMC, which became a new profit center and met the requirement that appraisers be outside the control of loan officers.

Since 2008, AMCs have effectively replaced independent appraisers. Unfortunately, polling of REALTORS(r) shows that appraisals have increased in cost, but decreased in quality (accuracy). Ironically, appraisers report that they are actually making less money for more work under the new structure. REALTORS(r) have voiced the following concerns:

Conflicts: First, the suggestion is made that because most AMCs are owned by a lender (or title company) involved in a transaction, the lender has a financial incentive to order the appraisal through its affiliated company – even if the AMC cannot provide the best value or a qualified appraiser familiar with the area in which the transaction takes place.

Out of area appraisers: Second, REALTORS(r) have reported seeing the assignment of unqualified appraisers from outside the general area of a transaction and complained that unfamiliarity with the area leads to improper valuation. Because the lender has a powerful financial incentive to use one of its own appraisers, even if they don't know the area, the lender may still use one of its own. If that "geographically incompent" appraiser undervalues the property, it either results in the loss of loan approval or precipitates a demand for a larger downpayment - either of which may cause the transaction to be lost.

How big a problem? It should be noted that so-called geographic incompetence is already a violation of the Uniform Standards of Appraisal Practice (USPAP), and yet there seem to be few disciplinary actions brought against individual appraisers for a violation. In 2010 C.A.R. sponsored AB 1796 (Hall), which would have required the OREA to issue regulatory "guidance" to AMCs, but the bill was defeated by a coalition of lenders, AMCs and title companies.

In large part, the previous legislation was defeated for lack of "horror story" examples of the problem of out of area appraisers. Nor was there a pattern of examples demonstrating that the "conflict of interest" of the bank owned AMC being assigned the work was actually resulting in damage to consumers or prospective homeowners by increasing costs or derailing transactions.

Are there actual examples available now that justify C.A.R. sponsoring legislation to increase the regulation of AMCs and their employed appraisers?

Potential opposition: Similar opposition is likely to surface on a new bill. Lenders and title will resist the potential loss of revenue from profitable affiliated entities, and AMCs themselves will resist additional regulation. Opponents will undoubtedly argue that the burden is on a C.A.R. as the sponsor to demonstrate actual harm to consumers, which will be difficult without "horror stories." AMCs will argue that existing rules already prohibit geographic incompetence, and that if REALTORS(r) or home buyers see a problem, the proper response should be to make a complaint to OREA. It appears that not many complaints have been made.
Appraiser groups have indicated that they would support additional regulation of AMCs, although they have not yet reacted to this proposal. Under a previous administration, OREA indicated that it would appreciate additional regulaltory authority, but also indicated that it had no track record of complaints on which to base a position.

Fiscal considerations: Imposing new duties on OREA to write regulations, and enforce them, will undoubtedly make the bill fiscal, and require the bill to pass the scrutiny appropriation committees of both legislative houses. OREA is a special fund agency under the Department of Consumer Affairs, which means that its operating budget comes only from the license fees paid by its licensees. Increasing the required regulatory activity and staff of OREA could result in higher appraiser license fees, and ultimately be reflected in increased costs of appraisals.

Should C.A.R. sponsor appraisal legislation as described above?