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Second Quarter 2016

Second Quarter 2016

April 15, 2016

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                                                                                

The Appraisal Institute on March 2 released a background document outlining ways in which the appraisal regulatory structure should be modernized. The document was prepared in response to an increasing number of AI professionals who have voiced serious concerns about regulatory and rules-based burdens that adversely affect their practice. 
 
AI believes that it is appropriate and timely for Congress to review how well the current federal and state regulatory structure and responsibilities are serving appraisers, consumers and other market participants. The recent decline in the number of appraisers, along with stagnant interest in entering the valuation profession, beg for review and discussion that could lead to meaningful change.
 
Read the background document and the accompanying memo authored by AI Government Relations Committee Chair, Justin D. Slack, MAI, SRA, AI-GRS, AI-RRS, that summarizes recent discussions and issues. Additional discussions are expected to occur in the coming months. 
 
The Appraisal Institute and a coalition of real estate industry groups on March 1 jointly submitted a letter to the House Financial Services Committee in support of HR 4620, the “Preserving Access to CRE Capital Act.” The bill would revise credit risk retention rules for commercial real estate loans as established by the Dodd-Frank Act.
 
The bill would allow “very prudently underwritten, low-risk commercial real estate mortgages” to meet the criteria for qualified commercial real estate loans under the risk retention rules. In stating its support for the bill, the coalition noted that the proposed revisions are based on actual performance data and correlate to loan characteristics that performed the best from 1997-2013. 
 
The bill would eliminate separate loan to value caps for commercial real estate loans with lower capitalization rates than other loans, reversing an arbitrary provision established in the final risk retention rules that potentially and unnecessarily constrains financing commercial real estate. 
 
AI joined such organizations as the CRE Finance Council, the Real Estate Roundtable, the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association, in signing the letter supporting HR 4620.
 
HR 4620 was approved by the House Financial Services Committee and now moves to a vote in the full House. 

IN THE AGENCIES                                                                       

The U.S. Department of Labor on April 6 released its final rule on “Conflicts of Interest” regarding advisors to retirement savings accounts. 
 
The Appraisal Institute views the rule as a victory for its professionals because all appraisal provisions were removed thanks, in part, to the feedback the Labor Department received at hearings and public comments, including testimony from AI President Scott Robinson, MAI, SRA, AI-GRS, that highlighted concerns from users of appraisal services and the valuation profession. 
 
In earlier proposals, the Labor Department had included appraisers in the definition of “fiduciary,” which would have imposed increased liabilities on valuation professionals who prepared appraisals for retirement funds investing in real estate and in instances of acquisition and disposition. Appraisals prepared for financial reporting purposes were exempted. 
 
While the valuation profession should celebrate its exclusion from the final rule, the Labor Department indicated that it intends to reserve appraisal issues for a future rulemaking. Specifically, it appears the focus will be on the valuation of employee stock ownership plans, but all appraisal issues may be examined.
 
The Appraisal Institute sees the future rulemaking as another opportunity to educate the Labor Department on the differences between appraisals and “fairness opinions” in the context of fiduciary obligations. 
 
See a side-by-side comparison of what was proposed and what was included in the final rule.
 
Regulatory changes instituted by the Federal Emergency Management Agency related to the National Flood Insurance Program have created opportunities for valuation professionals interested in helping local governments make determinations about “substantial improvement” and “substantial damage.” 
 
Communities that participate in FEMA’s NFIP must adopt and enforce regulations and codes that apply to new development in Special Flood Hazard Areas. Local floodplain management regulations and codes contain minimum NFIP requirements that apply not only to new structures, but also to existing structures that are substantially improved or substantially damaged.
 
Making the substantially improved/substantially damaged determinations requires local officials to perform four major actions: 1) determine costs; 2) determine market value; 3) make substantially improved/substantially damaged determinations; and 4) require owners to obtain permits to bring substantially improved or substantially damaged buildings into compliance with the floodplain management requirements. These determinations typically are sought by housing authorities located in flood plain areas.
 
Fannie Mae on March 29 introduced its HomeStyle Energy mortgages, a loan product that allows borrowers to finance energy-efficient upgrades when purchasing or refinancing a home and eliminate the need for a subordinate lien, a home equity line of credit, a Property Assessed Clean Energy loan or an unsecured loan. 
 
Under the program, borrowers can receive up to 15 percent of the as-completed appraised value of a home to use for energy-efficient upgrades once they submit an energy report, such as the Home Energy Ratings Systems — or HERS report — from a qualified Residential Energy Services Network energy rater. Borrowers also can finance up to $3,500 in water-efficiency upgrades without a report. 
 
HomeStyle Energy builds upon (and replaces) current energy improvement features in the Selling Guide. It is available for standard home purchases, limited cash-out refinance transactions and for larger renovation projects that include energy efficiency under the existing HomeStyle Renovation product. 
 
The Fannie Mae announcement is expected to increase interest in these agreements and other activities, such as the Appraisal Institute’s Professional Development Program on the Valuation of Sustainable Buildings, which is offered throughout the country. 
 
Earlier this year, AI and RESNET agreed to cooperate in several areas, including developing data points related to building efficiency and performance. AI and RESNET also have an agreement in place to auto-populate the AI Residential Green and Energy-Efficient Addendum with information from HERS reports. AI entered into a similar agreements with Home Innovation Research Labs in 2014 and with Pivotal Energy Systems last year.
 
The U.S. Department of Agriculture on March 29 announced that its Rural Housing Service issued a final rule amending current regulations related to lender indemnification, refinancing and qualified mortgage requirements for its Single-family Housing Guaranteed Loan Program.
 
The final rule expands the USDA’s lender indemnification authority for loss claims in the case of fraud, misrepresentation or noncompliance. This action will continue the Agriculture department’s efforts to improve and expand risk management of its loan program. The final rule also simplifies refinancing provisions so that a new interest rate does not exceed the interest rate on the original loan and adds a new refinance option known as “streamlined-assist.” 
 
A streamlined-assist refinance differs from traditional refinance options in that there is no appraisal or credit report requirement in most instances as long as a borrower has been current on the first mortgage for the previous 12 months and the new interest rate is at least one percent lower than what they previously had. A new appraisal is required for direct-loan borrowers who received a subsidy for the purposes of calculating subsidy recapture.
 
Lastly, the rule states that a loan guaranteed by RHS is a qualified mortgage if it meets certain requirements set forth by the Consumer Protection Finance Bureau.
 
The National Credit Union Administration on March 14 released a final rule regarding the ability of federally insured credit unions to make member business loans. The rule is a comprehensive overhaul of the way the NCUA approaches commercial lending, from both a regulatory and a supervisory perspective.
 
Provisions included in the NCUA's final rule:
  • Credit union loan officers are given the ability under certain circumstances to eliminate the need for a personal guarantee; 
  • Explicit loan-to-value limits are replaced with the principle of appropriate collateral and eliminate the need for a waiver; 
  • Limits on construction and development loans are lifted; 
  • Credit unions with assets less than $250 million and small commercial loan portfolios are exempted from certain requirements; and 
  • Nonmember loan participations is confirmed to not count against the statutory MBL cap. 
The final rule applies to commercial loans as newly defined under the proposal. The rule also will determine what loans are subject to the statutory MBL cap and which ones are subject to certain safety and soundness policy and infrastructure requirements. 
 
The expansion of business lending by credit unions is expected to present many challenging valuation questions. Appraisal Institute professionals are encouraged to conduct outreach with credit unions to identify areas of need and opportunity. 
 
The Appraisal Institute on April 8 submitted comments to the U.S. Department of Housing and Urban Development in response to proposed changes to Chapter 9 of the Section 8 Renewal Policy Guide. The proposed changes — the first in nearly two decades — relate to housing project rent renewals that utilize comparability studies performed by appraisers. 
 
In its comments, AI suggested that HUD take a fresh look at how rules and procedures relative to the appraisal process are utilized. “While we recognize that many sections of Chapter 9 were found in the existing policy, as we review the document with a fresh set of eyes, it is striking how prescriptive Chapter 9 has become,” the letter noted. “Built into the chapter are various procedures, formulas, rules of thumb and benchmarks that seem to dictate the appraisal process, rather than rely on professional judgment or market evidence. We do not believe that is conducive to deriving a market value opinion, nor is it beneficial to the public trust.”
 
AI suggested the removal of caps related to appraisal adjustments and to rely more on the professional judgment of qualified appraisers. The letter also suggested that policies emphasize the importance of competent review appraisers over that of the current checklist-driven approach. 
 
 
STANDARDS SETTERS                                                               
 
The Appraisal Institute responded March 31 to an Appraiser Qualifications Board exposure draft related to potential changes to Real Property Appraiser Qualification Criteria by encouraging the AQB to rethink the mandates for qualifying experience requirements for minimum licensing and certification. 
 
In its letter to the AQB, AI wrote, “States are not well-positioned nor resourced to administer an experience requirement in a consistent and qualitative manner. Moreover, experience should not be a requirement for a minimum state credential, as most professions require education rather than experience for entry into such professions. Experience comes later. This is how other professions, such as accounting, deal with minimum qualification requirements.”
 
The Appraisal Institute’s letter also addressed the issue of using the word “trainee” in criteria nomenclature and minimum requirements for supervisory appraisers and trainees, suggesting to the AQB that the role of establishing minimum qualifications in these areas should be reevaluated.
 
The Financial Accounting Standards Board on Feb. 25 released its comprehensive final standard on lease accounting, which consolidates all its lease guidance, including that which pertains to sale-leaseback transactions and determining expected lease payments and lease terms.
 
The FASB’s Accounting Standard Update on Leases (2016-02) will require organizations that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases. Currently, companies generally must treat lease payments as an operating expense.
 
The new standard takes effect for public companies for annual and interim periods beginning after Dec. 15, 2018. For private firms, it will take effect for annual periods beginning after Dec. 15, 2019, and interim periods the following year.
 
Most real estate leases, lessors and lessees will report on a straight-line basis. Moving forward, real estate developers have expressed ongoing concern that lessees may push for shorter-term leases without renewal options or contingent rents in order to minimize noncash lease costs. 
 
AI professionals are in a strong position to advise real estate clients regarding decisions on whether to buy or lease, and the organization urges its Designated Members to become familiar with the new standard and to reach out to corporate real estate clients to offer guidance on future business decisions.
 
IN THE STATES                                                                            
 
The Florida Real Estate Appraiser Board held two rule development workshops — one Feb. 9 the other April 4 — to consider new rules that would allow appraisers to use for certain assignments standards of appraisal practice other than the Uniform Standards of Professional Appraisal Practice. 
 
Florida law currently gives the FREAB authority to adopt “standards of professional practice that meet or exceed nationally recognized standards of appraisal practice.” The Appraisal Institute has proposed that the FREAB permit state-certified appraisers to utilize AI’s Standards of Valuation Practice and Valuers’ Code of Professional Ethics when performing consulting services, financial reporting and tax services, portfolio valuation and international services.
 
In its testimony to the FREAB, AI stated that its proposal would position appraisers to better meet client needs in a cost-effective manner while ensuring that the underlying tenets of appraisal practice — independence, objectivity and impartiality — are maintained. 
 
The FREAB will host an additional rule development workshop June 6.
 
Legislation under development by Michigan State Rep. David Maturen would make significant changes to how the Michigan Tax Tribunal considers real property tax appeal cases.
 
The legislation is expected to require the MTT to make its own independent determination and statement of finding of fact relative to the subject property, including: 1) highest and best use; 2) replacement cost; 3) comparable properties; 4) comparable adjustments; and 5) the most appropriate valuation method. 
 
The legislation also is expected to exclude comparable properties from consideration if they 1) have a highest and best use that is different from the subject; 2) were sold under economic conditions significantly different from those of the subject; 3) are vacant; and 4) are subject to a private restriction or covenant that prohibits or limits the current and lawful use of the property by a subsequent transferee. 
 
Development of the legislation was spurred by several recent decisions by the MTT that have reduced the tax assessments of big box retailers by allowing them to utilize market values of vacant store properties as comparable properties — the so-called “dark store” approach. Proponents of the legislation, including the Michigan Association of County Treasurers, claim that dark store appeals have resulted in $47 million in lost property tax revenue. 
 
The bill is expected to be introduced soon for consideration by the Michigan Legislature.
 
The Appraisal Standards Board on Feb. 10 released an FAQ that clarifies that a due date is not an assignment condition under the Uniform Standards of Professional Appraisal Practice and that missing a due date is not an actionable USPAP violation.
 
The clarification was issued in response to an email sent by the Oregon Appraiser Licensing and Certification Board this past September that stated, “Failing to adhere to the assignment condition can be an actionable violation of USPAP and Oregon Statute.” 
 
The Appraisal Institute wrote to the Oregon ALCB in October and stated, “What USPAP does say is that accepting an assignment condition that precludes an appraiser’s impartiality, which limits the scope of work so that the assignment results aren’t credible or limits the content of a report so that it’s misleading, is unacceptable. (Scope of Work Rule, U-14, Lines 441-442.) By accepting and not meeting an agreed upon due date, an appraiser has not automatically done anything that would compromise their impartiality, the credibility of the assignment results or limit the content of a report to such an extent that it is misleading. If an appraiser misses a due date but maintains impartiality, produces credible assignment results and does not limit the content of the report to the point that it is misleading, then no violation of USPAP has occurred.”  
 
Idaho became the 39th state to enact a comprehensive appraisal management company registration and oversight law on March 23 when Gov. Butch Otter signed SB 1318. The law takes effect July 1, 2017.
 
SB 1318 is heavily modeled on the federal “Minimum Requirements for Appraisal Management Companies,” which was published by the federal bank regulatory agencies on April 30, 2015. 
 
Under the provisions of SB 1318, AMCs operating in Idaho will be required to pay appraisers for their services within 45 days after the date the appraiser provides the appraisal to the AMC. AMCs also will be required to utilize state-certified appraisers to perform appraisal reviews, and if the review requires a review appraiser to provide an opinion of value, the review appraiser must be licensed in Idaho. AMCs operating within the state will be prohibited from employing or contracting with any appraisers who have had their license refused, denied, canceled, revoked or surrendered in lieu of revocation — unless the license was subsequently reinstated. These same limitations apply to entities, such as appraisal firms, that contract with an AMC. 
 
Legislation to enact similar AMC requirements currently is pending in Iowa, Massachusetts, New Jersey and South Carolina.
 
Indiana Gov. Mike Pence signed SB 300 into law on March 21, and provisions of the bill state that requirements of Indiana’s current appraiser licensing and certification law will not apply to:
 
“The performance of an evaluation of real property by an employee, an officer, a director, or a member of a credit or loan committee of a financial institution, or by any other person engaged by a financial institution, in a transaction for which the financial institution would not be required to use the services of a state licensed appraiser under regulations adopted under title XO of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.”
 
This new law may allow state-licensed and state-certified appraisers to perform evaluations without having to comply with the Uniform Standards of Professional Appraisal Practice. However, state-licensed and state-certified appraisers are cautioned to check with the Indiana Real Estate Appraiser Licensure and Certification Board and/or legal counsel prior to performing evaluation services that do not comply with USPAP. 
 
The two other states that have allowances for state-licensed and state-certified appraisers are Tennessee and Georgia. 
 
The Business & Occupational Licenses Committee of the Illinois House of Representatives on April 5 unanimously passed HB 5880, legislation that would prohibit appraisal management companies from requiring appraisers on its panel to pay the national registry fees assessed by the Appraisal Subcommittee.
 
The bill, which will now be considered by the full House of Representatives, would prohibit AMCs from requiring appraisers to reimburse them for any overhead costs and would prohibit AMCs from reducing their payments of reasonable and customary fees to appraisers to cover any overhead costs. 
 
The Minnesota State Legislature is considering House File 2991 and Senate File 2665 — two bills that would make significant changes to the state’s appraiser and appraisal management company licensing laws. 
 
If enacted into law, these comprehensive bills would introduce five significant changes: 
 
  1. The bills would end the state’s practice of assessing investigatory costs on state-licensed and state-certified appraisers when there is a finding of no violation on the part of the appraiser. 
  2. The bills would clarify that entities employing appraisers or ones that have 15 or fewer independent contractor appraisers are not defined as appraisal management companies for the purposes of the state’s AMC oversight and registration law. 
  3. The bills would enact state requirements for the payment of reasonable and customary fees, and would establish what methods could be utilized by AMCs as proof that fees paid to appraisers were reasonable and customary and were based on specific factors associated with each assignment. 
  4. The bills would require that an AMC separately state to its client the fees paid to appraisers and the fees charged by the AMC for management of the appraisal process. 
  5. The bills would require that appraisers be paid for their services within 30 days of the appraisal report being delivered to the AMC or within 30 days of the date the appraisal report is transmitted to the client by the AMC, whichever occurs sooner. 
 
The William Craig Company, an appraisal management company that was based in Auburn, Washington, has closed its doors allegedly leaving around $250,000 in fees unpaid to appraisers. Prior to shutting down, WCCI reportedly offered appraisers the option to be paid in WCCI stock.
 
Fortunately for appraisers, Washington requires AMCs operating in the state to post surety bonds of $100,000, the highest of any state currently overseeing AMCs. In order for appraisers to make a claim to the Washington Department of Labor for payment from WCCI’s bond, they likely will have to obtain a final judgment from a court and be unsuccessful in collecting on that judgment. It’s also possible that unpaid appraisers may be able to obtain payment directly from the client of the AMC that ordered the appraisal. 
 
Washington Gov. Jay Inslee on March 31 signed SB 5597 into law making it easier for out-of-state appraisers to obtain a Washington appraiser credential. 
 
The new law grants out-of-state appraisers a Washington credential if they are from a state deemed to be in compliance with FIRREA and where requirements for certification or licensing meet or exceed those of Washington. 
 
Previous versions of the bill included onerous background check requirements that far exceeded the minimum requirements for background investigations required by the Appraiser Qualifications Board. The background check provisions were removed after a request from the Appraisal Institute. 
 
Idaho Gov. Butch Otter on March 23 signed into law HB 368, legislation that changes the definition of “appraisal” and “appraisal assignment” so that it excluded analyses, opinions or conclusions related to the nature, quality or utility of specified interests in, or aspect of, real property. 
 
The changes clarify that an appraisal or appraisal assignment only relates to an opinion or a conclusion of real property value. The new definition should make it easier for appraisers practicing in Idaho to perform certain appraisal consulting-related assignments that do not contain a value opinion, including feasibility studies, market rent opinions, income and expense analyses, land utilization studies and supply/demand studies. 
 
 TIP LINE                                                                                       
 
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