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Second Quarter 2015

Second Quarter 2015

April 16, 2015

The Appraisal Institute’s Washington Report and State News quarterly e-newsletter is intended to summarize AI’s recent federal and state legislative, regulatory and related activities in representing the interests of Designated members, Candidates for Designation, Practicing Affiliates and Affiliates.

ON THE HILL                                                                                

In written testimony submitted Feb. 19 to the Senate Committee on Banking, Housing and Urban Affairs, the Appraisal Institute argued against increasing the current appraisal threshold of $250,000, raised concerns about Collateral Underwriter and warned against establishing “rules-based” appraisal processes. 
 
 
 
Several members of Congress have questioned a decision by The Appraisal Foundation’s Appraiser Qualifications Board that would require a college degree for individuals seeking a Certified Real Property classification starting this year without also providing an alternative track for licensed appraisers. 
 
The 2008 real property appraiser requirements, which also included college degree requirements in some instances, had offered individuals an alternative track that would allow them to become certified appraisers by taking specific coursework in lieu of earning a college degree. Members of Congress appear concerned about the impact on small business owners and the constantly changing nature of appraiser qualifications and appraisal standards. 
 
The Appraisal Institute will provide more information as it develops. Stay tuned. 

IN THE AGENCIES                                                                       

Appraisal Institute President M. Lance Coyle, MAI, SRA, met with Fannie Mae officials April 2 to discuss Collateral Underwriter, and he expressed concern about CU ratings becoming a set of rules used by lenders.
 
Coyle also affirmed that Designated members of the Appraisal Institute are in a strong position relative to CU in providing support for market analysis and appraisal information. 
 
The GSE reported that the January implementation of CU generally went as expected, reflecting a slight increase in appraisals that had to be resubmitted following implementation in January. The resubmittal rate indicates how often appraisals are adjusted following receipt of CU ratings and alerts. However, as loan sellers have used CU and adjusted processes during the past few months, the percentage of appraisals that had to be resubmitted reportedly has returned to rates prior to implementation — roughly 30 percent. 
 
Coyle also applauded the GSE’s new FAQ, which helps dispel several CU myths, including lender utilization of CU information and CU’s relation to the Appraiser Quality Monitoring initiative. 
 
The Appraisal Institute’s Washington office has heard several AI professionals express concern about the pending RESPA/TILA integrated disclosures rule that is set to take effect Aug. 1. Mortgage lenders have grappled with the rule for more than a year, and some industry groups have requested a delay in enforcement by the Consumer Financial Protection Bureau.
 
The rule creates two new residential mortgage transaction forms — the Loan Estimate form and the Closing Disclosure form. The rule also makes a slew of changes to RESPA and TILA, including an optional disclosure of appraisal management company fees and “zero tolerances” on appraisal service fees. However, coupled with these changes are new allowances for what constitutes “changed circumstances,” making clear that higher fees can be charged when there is an increase in the scope of work in the appraisal assignment. Mortgage lenders have established individual policies to handle the changes, and as a result interpretation of the rule likely will vary. 
 
Various concerns about the rule include a fear of running afoul of the CFPB, taking a loss on adjusted appraisal fees and/or contending with new loan estimate disclosure requirements, attempts to lock in fees paid to appraisers and AMCs or a move away from lender-imposed fee schedules altogether. Of course, consideration also must be given to rules requiring payment of customary and reasonable fees to appraisers, which seemingly helps insulate appraisers from some of these issues. 
 
AI anticipates more questions to arise in the coming months. We encourage appraisers and AMCs working with lenders to encourage policies with maximum flexibility, making sure that equal credence is given to the “changed circumstances” allowances as to those for zero tolerances. Please email Bill Garber with any issues or questions that arise in your daily practice: bgarber@appraisalinstitute.org.
 
The Connecticut Green Bank in Rocky Hill wants real estate appraisers interested in doing work for its Commercial and Industrial Property Assess Clean Energy Program to respond to its request for qualification and submit their “green” credentials. 
 
The Green Bank RFQ lists the Appraisal Institute’s Valuation of Sustainable Building Professional Development Program on its list of preferred qualifications. Pending a review of qualifications, the bank will seek to enter into a contract on a retainer basis.
 
Find more information on the green RFQ
 
The Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency released on March 31 a Frequently Asked Questions document related to Basel III Regulatory Capital Requirements and other issues related to loan classifications included in a final rule that took effect earlier this year.
 
The biggest issue involves “High Volatility Commercial Real Estate,” which is a classification of loans for acquisition, construction and development and that requires lenders to set aside additional capital — something that most banks attempt to avoid. 
 
The Appraisal Institute has heard from several commercial real estate lenders about appraiser analysis of “entrepreneurial incentive” — or developer profit within appraisals providing opinions of the as-completed value. Some expressed concern about overreliance on rule of thumb and said they would like to see more support for profit within the development cycle. 
 
The as-completed value construct is not new to appraisal practice. The Interagency Appraisal and Evaluation Guidelines include a definition, it is taught in appraisal courses and is commonly requested in construction loan appraisals. Essentially, the as-completed value is equal to the “prospective market value.” This value is different from the prospective market value “as stabilized,” illustrating the point that profit on a development is earned incrementally, typically during three periods in the development process:
 
1. Entitlement
2. Construction
3. Absorption/marketing (rent up) 
 
The as-completed value includes a portion of entrepreneurial incentives attributable to entitlement and construction periods, but not the portion attributable to the marketing and absorption (rent-up) period. 
 
Several means of analysis are available to appraisers regarding treatment of entrepreneurial incentive in a development project (those methods are taught in the AI course Advanced Concepts & Case Studies). To avoid complications resulting from the use of rule of thumb or generally weak analysis of the issue of entrepreneurial incentive, banks facing HVCRE loans should utilize professionally designated appraisers who have completed courses and request that the entrepreneurial incentive and rent-up adjustment methods are used in the development of the as-completed value. Doing so can help increase appraisal credibility used in construction projects, which will be more closely scrutinized in response to HVCRE and the new regulatory capital rule. 
 
View the FAQs here

STANDARDS SETTERS                                                               

The National Council of Real Estate Investment Fiduciaries, the Pension Real Estate Association, the European Association for Investors in Non-Listed Real Estate Vehicles and the Asian Association for Investors in Non-Listed Real Estate Vehicles announced March 23 that they would collaborate on the development of uniform reporting standards for institutional real estate investment vehicles. 
 
These standards include real estate valuation requirements — typically third party valuations completed annually if not more frequently — by professionally designated real estate appraisers. 
 
Appraisers in the U.S. may be most familiar with the Real Estate Information Standards currently published by the REIS Council, an organization sponsored jointly by NCREIF and PREA. The new standards likely will be similar in scope and content, with the collaboration indicating that real estate trades in a global economy and that institutional investors prefer comparability of information and data.
 
Find more information on the REIS standards; INREV; and ANREV.
 
The Federal Aviation Administration in February released its long-awaited proposed rules governing the use of small commercial drones and is seeking public comment on the proposal by April 24.
 
Under the new policy, the FAA will grant a Certificate of Waiver or Authorization for flights at or below 200 feet to any UAS operator with a Section 333 exemption for aircraft that weighs less than 55 pounds, operates during daytime Visual Flight Rules conditions, operates within visual line of sight of the pilots and operates five miles from airports or heliports.
 
The “blanket” 200-foot waiver allows flights anywhere in the country except in restricted airspace and other areas where the FAA prohibits UAS operations. Previously, drone operators had to apply for and receive a COA for a particular block of airspace, a process that could take 60 days. 
 
The FAA expects its proposed policy to allow companies and individuals who want to use UAS within these limitations to start flying much sooner than in the past.
 
The FAA also is considering the creation of a separate category for very small drones (those under 4.4 pounds) and regulations that would allow operators to fly drones over people.
 
Read a copy of and submit comments about the proposal FAA drone rules.
 
The Federal Aviation Administration proposed additional height restrictions on buildings near airports, which has caused a dispute between supporters (airlines and airports) and opponents (developers). The FAA said that buildings near airports should be shorter to increase safety and give pilots more options in case of an emergency.
 
While the FAA cannot restrict building size, it can issue guidance to zoning officials regarding proposed projects, which could cause zoning officials to deny building permits. 
 
The FAA quietly released its proposal several months ago, but due to pushback it received it held two public comment periods and plans to forge ahead with its plan. 
 
The Federal Housing Administration will host a conference call April 16 for appraisers and underwriters interested in hearing about changes in the revised Single-Family Handbook, including to the Appraiser and Property Requirements section and the Appraisal Report and Data Delivery Guide.
 
The changes were proposed last summer and will take effect June 15.
 
When: April 16, 2-3 p.m. EST; dial-in number: 866-254-5938, access code 355440. 
 
The International Valuation Standards Council’s Standards Board issued a draft of its proposed changes to the IVS and is accepting public comments through June 19.
 
Proposed changes involve some to the IVS structure itself, including repositioning guidance intended to support mandatory requirements so it resides with those requirements, and changes to various headings and introductions to make it easier to understand the difference between mandatory requirements and supporting guidance. 
 
The IVSC Board of Trustees has commissioned a review of the IVSC’s strategic objectives and priorities, which may result in further recommended changes to the IVS.
 
The IVSC stated that recommendations stemming from public review will be considered before any amended standards are issued, and depending on recommendations from the review, an additional Exposure Draft may be released, which could push back the planned effective date of January 2016. 
 
View the Exposure Draft.
 
The Appraiser Qualifications Board on March 20 adopted significant changes to the background check requirements of the Real Property Appraiser Qualification Criteria. The new requirements are modifications to original background check requirements adopted by the AQB in December 2011, which never took effect. The new requirements will take effect Jan. 1, 2017. 
 
The new requirements state, “All applicants for a real property appraiser credential shall possess a background that would not call into question public trust.” Applicants will be required to provide state regulatory agencies with all information and documents necessary for the jurisdiction to determine an applicant’s fitness for licensure or certification. Applicants who have been convicted of or pleaded guilty or nolo contendere to a crime that would call into question the applicant’s fitness for licensure with the five-year period immediately preceding the date of the application for licensing automatically would be disqualified from obtaining an appraiser credential.
 
Importantly, these new requirements provide states with much more flexibility in how they determine whether or not an applicant has a background that would call into question the public trust. The original requirements adopted in 2011 required all candidates for a real property appraiser credential to undergo “background screening” and to provide fingerprints to the state appraiser licensing and certification agency for submission to the Federal Bureau of Investigation (or other government agency) to utilize in connection with a state and national background check. Under the new requirements, states are not required to perform formal background checks and can instead satisfy the minimum AQB criteria by asking appraisers if they have any events in their past that may disqualify them from obtaining an appraiser credential. 
 
Unfortunately, the impact of these new requirements on the state background checks that appraisers are required to undergo likely will be limited because most states (42) enacted their background check requirements prior to the AQB’s requirements. Many of these state laws contain provisions that were consistent with the 2011 criteria and require appraisers to submit fingerprints and to undergo formal background checks by a state or a federal law enforcement agency. 
 
The AQB also adopted a new “AQB Guide Note (GN-9)” that gives states additional guidance on how to evaluate an applicant’s background, including “Examples of Issues to Consider” and examples of elements of an applicant’s background that have a “Substantial Relationship” to the qualifications, functions and duties of an appraiser. The Guide Note also suggests that state appraiser licensing agencies “should consider all evidence related to the extent an applicant is rehabilitated.”
 
In a letter to the AQB last July, the Appraisal Institute requested that any background check requirements be made applicable only to new appraiser credential applicants who currently are not credentialed in another state. AI also requested that any background check requirements exempt existing credential holders and applicants for a credential via reciprocity or a temporary practice permit. 
 
Read the new background check requirements as they were proposed in the Fifth Exposure Draft of a Proposed Revision to the 2015 Real Property Appraiser Qualification Criteria and Guide Note 9 (GN-9).
 
The Appraisal Standards Board on Feb. 6 adopted modifications to the Uniform Standards of Professional Appraisal Practice for 2016-17. The action followed a 19-month process during which four exposure drafts were issued, as well as another one on proposed Advisory Opinions; the Appraisal Institute provided input to ASB during the process.
 
 

IN THE STATES                                                                            

Arizona Gov. Doug Ducey on March 12 signed into law SB 1480, legislation that eliminates the Arizona Board of Appraisal effective July 1. The ABOA’s administrative functions will be reassigned to the Department of Financial Institutions. This provision was included in the state’s FY 2016 budget that passed the legislature March 7. 
 
Arizona will join a handful of states that don’t have an appraiser board or commission. According to the Executive Summary accompanying the Governor’s budget proposal, the action was necessary because the shrinking population of licensed appraisers was depleting ABOA revenues and that was “threatening the ability of the Board to fulfill its statutory obligations.”
 
During the debate on the legislation, concern was expressed about assigning oversight of appraisers to the same agency in charge of overseeing and regulating state chartered financial institutions and mortgage loan originators. According to the Appraisal Subcommittee’s Policy Statements, “States should maintain an organizational structure for appraiser certification, licensing and supervision that avoids conflicts of interest.” However, the Policy Statements also say that a “State has flexibility to structure its Program so long as it meets its Title XI related responsibilities.” The ASC did not take a position on the Arizona legislation. 
 
In a March 12 email to its members, the Phoenix Chapter of the Appraisal Institute stated that the “PCAI Board is reaching out to the Superintendent of Financial Institutions to be a source of information, offer assistance on behalf of our members and to aid in addressing concerns of our members.” Additionally, the PCAI stated that it will “work to ensure that the organizational structure complies with Appraisal Subcommittee and that Arizona maintains its current ‘excellent’ rating as determined by the ASC.”
 
View a copy of SB 1480 (specifics are on pages 5-10).
 
The Appraisal Institute California Government Relations Committee announced March 24 a legislative campaign to amend the state’s appraisal license law to allow state-licensed appraisers to use valuation standards other than the Uniform Standards of Professional Appraisal Practice when performing appraisals for any purpose other than for federally related transactions. 
 
Under existing California law, Residential, Certified Residential and Certified General Appraisers must comply with USPAP when performing any real estate valuation services in the state, whether or not the services are performed for a non-FRT-related purpose, such as asset management, feasibility studies, litigation support, tax consulting, financial reporting or portfolio valuation, among others. 
 
When the AIC-GRC announced its legislative campaign, it noted, “California's law impedes the ability of California appraisers to do work outside of the country or for a foreign entity because clients demand compliance with the standards applicable to them, rather than USPAP.”
 
The announcement also stated, “The provisions of USPAP are focused primarily on the appraisal needs of financial institutions involved in mortgage loan origination” and that “the evolution of USPAP over the past quarter-century to a rules-based rather than a principles-based set of standards makes it not always relevant for non-mortgage purposes.”
 
The AIC-GRC announcement concluded, “This modernization of the appraisal licensing law will assist California appraisers in meeting the needs of their clients in an effective and efficient manner, while still maintaining the highest levels of professionalism and maintaining the public trust.”
 
Staff from the Appraisal Institute’s Washington office and professionals from AI’s Connecticut Chapter, as well as from the Connecticut Real Estate Appraisal Commission testified before the Connecticut Insurance and Real Estate Committee Feb. 19 in opposition to HB 6677. As introduced, the legislation would allow real estate brokers and salespersons to estimate the value of real estate for a fee. 
 
Under existing Connecticut law, a real estate broker or salesperson may perform a market analysis for the purposes of a prospective real estate purchase, listing or sale. If a broker or salesperson performs a market analysis and obtains the listing as a result of that analysis, then the amount the seller or purchaser paid for the BPO is required to be credited against any compensation paid to the broker or salesperson. 
 
In its testimony, AI stated that HB 6677 goes far and beyond broker price opinion bills the legislature previously has considered because it allows brokers and salespersons to offer opinions of the value of real estate. AI also stated that if HB 6677 becomes law, it would instantaneously turn the state’s approximately 22,000 real estate brokers and salespersons into appraisers by allowing them to estimate the value of real estate for virtually any purpose (except federally related mortgage lending transactions). 
 
In its testimony, AI noted that it would not matter if a broker or salesperson’s opinion of the value is referred to as an appraisal, an opinion of value, a BPO, a comparative market analysis or any other term, because it would contain a market value and therefore be considered by those who use appraisal services to be equivalent to appraisals performed by state-certified appraisers.
 
Take a look at HB 6677
 
The Georgia legislature on April 1 completed action on HB 253, which will require appraisal management companies operating in the state to pay appraisers a reasonable and customary rate. The bill was presented to Gov. Nathan Deal for consideration.
 
The legislation, which was requested by the Georgia Real Estate Appraisers Board, grants GREAB the authority to enact rules and regulations to enforce the new requirements. 
 
The state already requires AMCs to separately report to client the fees paid to appraisers for appraisal services and the fees charged by an AMC for services associated with management of the appraisal process. 
 
View a copy of HB 253.
 
The North Carolina House of Representatives introduced on April 2 legislation (HB 577) that would require appraisal management companies to compensate appraisers at a reasonable and customary rate. 
 
If the legislation becomes law, the North Carolina Appraisal Board would be required to publish a schedule of customary and reasonable compensation rates every three years, and when AMCs renew their registration they would be required to provide the NCAB with the number of appraisals they performed in the state and the total net compensation paid for all appraisals performed. They also would be required to inform clients of the fee that was paid to the appraiser for the appraisal and any other fees charged for appraisal management services. 
 
A date for hearings and further consideration of the bill has not yet been established. 
 
View HB 577
 
Staff from the Appraisal Institute’s Washington office and professionals from AI’s Oregon Chapter testified March 20 before the Oregon House of Representatives Committee on Business and Labor in support of pending legislation (HB 3419) that would prohibit financial institutions from using broker price opinions for purposes of mortgage loan origination or in conjunction with a foreclosure. 
 
In its testimony, AI stated, “Our position has long been that financial institutions should be precluded from using BPOs for all residential and commercial mortgage loan originations, in foreclosure situations and for purposes of short sales.” AI noted its position is “primarily due to the potential for a broker or salesperson to be biased in favor of their client — the financial institution — when performing these services.”   
 
AI submitted a package of amendments that also would prohibit the use of comparative market analyses, evaluations and letter opinions for the same purposes. 
 
Follow HB 3419.
 
A hearing was held April 1 in the Texas Senate Business and Commerce Committee on HB 2850 and SB 1007, legislation that would make comprehensive changes to the state’s appraiser licensing and certification law. 
 
If enacted into law, provisions of these two bills would:
 
1) Clarify that an appraiser who is certified by a jurisdiction other than Texas can provide an appraisal review on real property located in the state without obtaining a Texas appraiser credential as long as the appraiser does not offer an opinion of value as part of the appraisal review;   
 
2) Require that appointees to the Texas Appraiser Licensing and Certification Board undergo training on: a) the Texas appraiser licensing law and other laws applicable to the board; b) the programs, functions, rules, and budget of the board; c) the results of the most recent formal audit of the Board by the Appraisal Subcommittee; d) the requirements of the law relating to open meetings, public information, administrative procedure, and conflicts of interest; and e) any applicable ethics policies before the Board members is allowed to attend Board meetings, deliberate or vote; 
 
3) Expand the membership of the Board’s appraisal management company Advisory Committee to include one additional consumer member and one additional AMC representative; 
 
4) Impose requirements that appraisers disclose certain information regarding criminal convictions; 
 
5) Allow (but not require) the Board to enact rules to mandate that an applicant for a certificate or license or renewal to submit fingerprints for the purpose of obtaining criminal history record information from the state’s Department of Public Safety or the Federal Bureau of Investigation; and 
 
6) Allow the Board to adopt rules relating to the standards for the development of an appraisal by a certified or licensed appraiser that are recognized as substantially equivalent to or consistent with the Uniform Standards of Professional Appraisal Practice. 
 
Review a copy of HB 2850 and SB 1007
 
Virginia Gov. Terry McAuliffe on March 23 signed into law SB 1445, which requires appraisal management companies operating in the state to compensate appraisers at a reasonable and customary rate. The legislation gives the Virginia Real Estate Appraiser Board authority to take administrative action against AMCs not paying appraisers customary and reasonable fees in accordance with federal law.
 
Prior to enactment of the legislation, Virginia law already required an appraiser engaged by an AMC to disclose as part of the appraisal report the actual fee they were paid. In 2014, the Virginia Center for Housing Research and the Virginia Tech Program in Real Estate completed a survey of Virginia residential real estate appraisers to analyze the patterns of fees earned by appraisers the previous year. Prior to release of the report, no data existed that defined customary and reasonable residential real estate appraisal fees in Virginia.
 
Several other states have provisions in their AMC laws similar to those passed by Virginia, and a few others currently are considering similar legislation. Some states simply require AMCs to provide a certification to the state appraiser licensing and certification agency stating that they are complying with federal law regarding payments of reasonable and customary fees. Other states specifically require the payment of reasonable and customary fees and grant authority to the state licensing agency to investigate complaints against AMCs related to appraisal fees and to take administrative action against those found to be in violation of state law.
 
View a copy of Virginia’s new AMC law.
 
The Appraisal Institute’s four Washington chapters submitted written testimony Feb. 18 to the Washington State Legislature regarding SB 5597, a bill that would implement fingerprint-based background checks for all appraisers in the state, including existing credential holders who are renewing their licenses.
 
In their testimony, the chapters noted that the Appraiser Qualifications Board had not yet finalized its proposed changes to the background investigation requirements. Additionally, the chapters stated that the proposed changes to the AQB minimum qualification criteria “would no longer be required to conduct FBI, fingerprint-based background checks for all new applicants for licensure or certification as appraisers. Instead, states would be granted significant flexibility to determine whether an applicant possesses a background that could call into question the public trust.” The chapters suggested that it would be “premature for the Washington State Legislature to adopt state law that implements the background investigation requirements.”
 
The chapters also took issue with a provision in the bill that granted the state’s Department of Licensing the authority to conduct fingerprint-based background checks on existing credential holders at each renewal period. 
 
The chapters stated that they did not “feel that it is appropriate for the DOL to conduct background investigations on existing credential holders who have maintained their licenses in good standing and are seeking to renew or upgrade their existing credential” and that “some existing credential holders have been licensed or certified in Washington for more than 30 years without ever having to undergo a background investigation.” The chapters suggested an alternative, stating “It is sufficient for the DOL to simply require existing credential holders to attest under oath as to whether or not there has been any changes in the appraiser’s background since the last renewal that would call into question the public trust.”
 
The Appraisal Institute announced March 11 that it has analyzed and compiled all state licensing and certification statutes and regulations pertaining to background checks for applicants seeking appraiser credentials and published them in the special report “State Requirements Regarding Background Checks for Real Estate Appraisers.”
 
AI’s analysis shows that 42 states have enacted background check statutes or regulations of some form for real estate appraisers. Only 10 states had background check requirements in place prior to 2011, which is when the Appraiser Qualifications Board first included background checks as part of the minimum qualifications criteria. The AQB will consider additional changes to background check requirements at a public hearing March 20. 
 
Most states require fingerprint-based formal background checks/criminal history records checks, but only a handful of states require an additional background check at each renewal period. However, many states require appraisers to submit new fingerprints and undergo new background checks when upgrading their credentials from trainee to licensed/certified, from licensed to certified residential/general or from certified residential to certified general.
 
Additionally, 21 states require appraisers to undergo background check/criminal history records checks before obtaining a credential by reciprocity, but only nine state require background checks for temporary practice permits. 
 
The 76-page report is free to Appraisal Institute professionals and available for purchase for $50 by others interested in receiving a copy. 
 

MEETINGS OF NOTE                                                                   

Staff from the Appraisal Institute’s Washington office participated in the Risk Management Association Chief Appraisers Roundtable March 27 in Scottsdale, Arizona, as part of a panel discussion on licensing requirements for review appraisers. Other panelists included representatives of The Appraisal Foundation, the Appraisal Subcommittee and the Association of Appraiser Regulatory Officials. 
 
AI Past President, Richard L. Borges, II, MAI, SRA, AI-GRS, AI-RRS, and staff from AI’s Washington office were part of a panel assembled by the Environmental Bankers Association Jan. 12 in Charleston, South Carolina, to discuss “Bridging the Gap between the Appraisal and Environmental Processes.” Richard J Roddewig, MAI, also participated on the panel, which delved into issues relating to environmental considerations required of appraisers and the integration of appraisal and environmental functions within banks. 

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