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First Quarter 2017

January 17, 2017

The Appraisal Institute’s Washington Report and State News quarterly e-newsletter summarizes 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 testimony Nov. 16 before a subcommittee of the House Financial Services Committee, the Appraisal Institute said there is a “better, less complicated approach” that would modernize the U.S. appraisal regulatory structure by improving quality, reducing costs and addressing fundamental concerns that drive appraisers from the profession.
 
AI suggested that Congress realign the appraisal regulatory structure with those of other industries in the real estate and mortgage sectors.
 
“Appraisers are being choked by rules and regulations in nearly every facet of their business,” the Appraisal Institute noted in written testimony to the Housing and Insurance Subcommittee. 
 
AI also noted, “Real estate appraisers face a ‘layering effect’ of rules and regulations that creates a disincentive for potential entry into the profession, while also diminishing the profession’s profitability.” 
 
As examples of these rules, AI cited background checks with no federal mandate or efficient processing system, and unappealing supervisor-appraiser and trainee-appraiser requirements, among others.
 
“Presently, real estate appraisers pay for the operation and maintenance of the regulatory structure in a variety of ways, including imposing license renewal fees, course requirements and mandates to purchase rules and regulations. After almost 27 years, it is time to make the appraisal regulatory structure and process more efficient and responsive to the needs of practitioners and consumers,” Bill Garber, Appraisal Institute director of government and external relations, told the subcommittee at the hearing.
 
The Appraisal Institute created an Appraisal Modernization site that will regularly be updated. Additionally, AI professional are encouraged to contact members of the AI Government Relations Committee with questions, concerns or reform ideas. Contact information is listed at the bottom of this email. 
 
Read AI’s testimony before the subcommittee of the House Financial Services Committee.
 
 
Federal legislative and regulatory activity is expected to accelerate and change in significant ways with Republican control of the House, Senate and the White House. The 115th Congress is expected to push for tax reform and regulatory relief that could impact the entire real estate industry.
 
Specifically, tax reform could target certain mortgage deductions and the expensing and depreciation of improvements of commercial properties. The estate tax also may be a target for reformers. Also likely to see a good deal of attention is infrastructure development and financing — something the incoming Trump administration has cited as a priority. 
 
Within banking and financial services, Republicans are expected to target elements of the Dodd-Frank Act, although Democrats are expected to mount a strong defense. The Republican’s stronger political hand may enhance efforts to fully privatize Fannie Mae and Freddie Mac, but such a move would almost certainly face opposition within parts of the real estate and mortgage finance sectors. A privatized Fannie Mae and Freddie Mac likely would likely still benefit from strong appraisal policies (policies potentially not set in statute) because risks would be transferred from taxpayers to investors. 
 
Regulatory relief and environmental issues could be affected by increased scrutiny or a complete rollback of the U.S. Department of Labor’s fiduciary rule and overtime pay rule. The Appraisal Institute opposed both rules. The fiduciary rule, at least in the interim, excluded appraisal issues. The fate of the overtime pay rule currently faces legal challenges, with a district court issuing an injunction late last year prohibiting the rule from taking effect. That rule may face further Congressional scrutiny under legislation passed Jan. 4 that gives Congress the ability to undo “midnight regulations,” which are regulations finalized within the last 60 days of the Obama administration. Another bill that was introduced in the House would require agencies to gain Congressional approval before finalizing any rule, which would be a dramatic change in federal regulatory policy. 
 
Regular congressional business will most likely involve the reauthorization of the National Flood Insurance Program, which is set to expire this year. 
 
New administration priorities will begin to reveal themselves very shortly as the FY 2018 budget process begins. Overall, 2017 is expected to be a busy one in Washington.
 
IN THE AGENCIES                                                                       
 
The IRS on Dec. 23 released Notice 2017-10 that identified certain syndicated conservation easement transactions as listed transactions. Investors who have entered into such transactions since 2010 or who enter into such transactions prospectively must comply with certain disclosure requirements, and appraisers acting as advisors must comply with certain disclosure obligations under the notice.
 
Specifically, the notice requires investors entering into syndicated conservation easement deals on or after Jan. 1, 2010, to file a tax shelter disclosure statement. The promoters, including appraisers and other material advisors, must file Form 8918 for the same period. This form must be filed by May 1, and failure to do so carries significant penalties. 
 
The IRS intends to challenge the purported tax benefits from these transactions based on the overvaluation of a conservation easement. The IRS may also challenge the purported tax benefits from these transactions based on the partnership anti-abuse rule, economic substance or other rules or doctrines.
 
The IRS describes a typical syndication arrangement as:
 
  • Promoters identify a pass-through entity that owns real property or form a pass-through entity to acquire real property. The promoters then syndicate ownership interests in the pass-through entity that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and half times the amount of the investor’s investment.
  • The promoters obtain an appraisal that purports to be a qualified appraisal as defined in § 170(f)(11)(E)(i), that is said to greatly inflate the value of the conservation easement based on unreasonable conclusions about the development potential of the real property. 
  • After an investor invests in the pass-through entity, either directly or through one or more tiers of pass-through entities, the pass-through entity donates a conservation easement encumbering the property to a tax-exempt entity. Investors who held their direct or indirect interests in the pass-through entity for one year or less may rely on the pass-through entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under § 170(e)(1). 
  • The promoter receives a fee or other consideration with respect to the promotion, which may be in the form of an interest in the pass-through entity. 
 
The Appraisal Institute has issued two previous warnings about syndication arrangements. The AI Government Relations Committee is reviewing the notice, and appraisers who practice in this area are encouraged to contact committee members or the AI Washington office with questions or concerns. 
 
AI is concerned that it may not be clear to appraisers that an entity is/was a syndicated arrangement, or have knowledge of how the property was marketed, which is complicated by the fact that the policy applies six years retroactively. To address this concern, practicing appraisers likely would benefit from obtaining a sworn disclosure statement from clients as to whether a proposed assignment meets the criteria for a listed transaction.
 
 
 
The Federal Housing Finance Agency on Dec. 13 issued a final rule that requires Fannie Mae and Freddie Mac to submit plans for improving the distribution and availability of safe and sound residential mortgage financing in underserved markets. Markets of particular concern involve manufactured housing, affordable housing preservation and rural areas. 
 
The rule implements the “duty to serve” provisions outlined in the government-sponsored enterprises’ authorizing statutes and establishes a method for FHFA to annually evaluate, rate and report to Congress on the GSEs’ compliance with its required duty-to-serve obligations. 
 
During the open comment period for the rule, there were several mentions about the need for loan products that address the breakdowns in markets that occur when appropriate comparison data is not available to support appraisals. No particular action was taken relative to appraisals, except one provision related to unoccupied units that allows appraisers for underwriting purposes to set the market rent for similar units and receive duty to serve credit. 
 
 
 
The Appraisal Institute on Oct. 31 sent a letter to the Federal Housing Finance Agency expressing “serious concern” about a policy change made to Freddie Mac’s Loan Advisor Suite in which appraisals would be waived in lieu of an “appraisal alternative” in multiple situations, including first purchase loans. 
 
Unlike the Property Inspection Waiver policies announced by Fannie Mae Oct. 24 — which are limited to lower-risk refinance transactions — the policy change by Freddie Mac appears to target purchase mortgage transactions, which carry higher risk from a property information standpoint. It has become standard practice to obtain a complete interior inspection appraisal for mortgage transactions in order to better understand such things as property conditions, which are more likely to change between purchase transactions than between refinance transactions. That likelihood is why appraisal data, including an inspection, is so important to managing risk. 
 
AI noted in its letter, “The decision by Freddie Mac to veer from fundamental risk-management practices appears reckless and imprudent, and harkens back to the loan-production-driven years leading up to the financial crisis. Similar actions were taken by government-sponsored enterprises in the early to mid-2000s, and the resulting decline in risk management by mortgage lenders was disastrous for the economy. In fact, the Government Accountability Office confirmed that such appraisal waivers were in widespread use leading up to when the government-sponsored enterprises were taken into conservatorship, with as many as 30 percent of loans receiving such waivers.” 
 
AI further noted, “It has taken many years for the mortgage finance sector to recover, but progress has been made, in large part, because fundamental risk-management activities like appraisal have been reinforced by mortgage lenders. Reducing appraisal requirements sends the wrong signal to mortgage loan sellers about the importance of fundamental risk-management practices.” 
 
The Appraisal Institute met with Freddie Mac leadership in December to discuss the letter and their concerns. Freddie Mac confirmed that use of appraisal alternatives would include purchase mortgages, but that they are targeting loan risk transactions, and claimed that a supermajority of loans will still require appraisals. The Appraisal Institute reiterated its concerns about unintended consequences resulting from reduced appraisal requirements, particularly those that rely on automated analytical systems that attempt to analyze collateral risk, known as “black boxes.” The Freddie Mac officials agreed to continue to discuss the concerns with the Appraisal Institute and address education and awareness issues. 
 
 
 
The U.S. Environmental Protection Agency on Dec. 7 published a final rule that added "subsurface intrusion” and “vapor intrusion” components to the Hazard Ranking System used to evaluate sites for the Superfund National Priorities List.
 
The Hazard Ranking System quantifies negative impacts to air, groundwater, surface water and soil to determine what sites qualify for the National Priorities List. 
 
The EPA stated that the regulatory change will not affect the status of sites currently on or proposed for the National Priorities List. The modification only augments criteria for applying the Hazard Ranking System to sites that will be evaluated in the future. 
 
 
 
The federal bank regulatory agencies charged with issuing a report to Congress on the burdens imposed on banks by the Paperwork Reduction Act was delayed, and instead of being released at the end of 2016 as expected, should be released early this year, the Appraisal Institute noted Jan 17. 
 
The report is significant because it should indicate the direction the agencies will go relative to regulatory pursuits related to appraisal requirements, including, but not limited to, appraisal threshold levels. 
 
AI anticipates changes of some sort to be advanced by the agencies, but remains hopeful the agencies will continue to emphasize sound appraisal policies by financial institutions of all sizes. 
 
 
The U.S. Department of Justice on Dec. 6 released an interim version of the long-awaited sixth edition of the Uniform Appraisal Standards for Federal Land Acquisitions, known as the Yellow Book. The publication was last updated in 2000. 
 
The interim version can be downloaded from the DOJ website, but it is not printable and does not include a finalized index, table of authorities or appendix. The final version is expected to be posted in the coming weeks and will be available to the public for free. 
 
The Appraisal Institute on Jan. 11 hosted a free webinar on the major changes to the Yellow Book, and an archive is available online. AI also is developing a comprehensive classroom course on the updated edition. 
 
Download the sixth edition of the Uniform Appraisal Standards for Federal Land Acquisitions
 
 
The U.S. Department of Agriculture on Oct. 18 published a final rule for the Agricultural Conservation Easement Program, in which policies related to the Wetlands Reserve Program and the Farm and Ranch Lands Protection Program were consolidated with land eligibility elements from the Grassland Reserve Program, as called for in the 2014 Farm Bill. 
 
The final rule for ACEP intends to make the program more flexible and responsive to the special needs of farmers and ranchers. 
 
Under the final rule, an entity eligible for the program is responsible for obtaining a fair market value determination of the easement by using one of the approved methods in accordance with the Agriculture Department’s Natural Resources Conservation Service specifications and applicable industry standards. The NRCS approved the use of the Uniform Standards for Professional Appraisal Practice, the Uniform Appraisal Standards for Federal Land Acquisition and area-wide market analysis procedures. USPAP may serve as an industry standard for area-wide market analysis. 
NRCS stated that it will review any standards submitted by eligible entities and compare them with the appraisal standards under USPAP or the Uniform Appraisal Standards for Federal Land Acquisition to determine if the alternative methodology sufficiently determined the fair market value of the easement. 
 
During development of the final rule, the NRCS reviewed the benchmark valuation model from the Farm Credit Association and determined that that methodology alone is not sufficient because it only derives market value of the fee estate, and not the easement value as required by statute. 
 
Find more information on the ACEP final rule.
 
IN THE STATES                                                                            
 
The North Carolina Appraisal Board on Dec. 13 released the guidance document Customary and Reasonable Compensation for Appraisers that provides interim guidance on implementation of a new law requiring AMCs operating in the state to offer reasonable and customary compensation to appraisers in compliance with federal law.
 
Federal law establishes two “presumptions of compliance” regarding AMCs paying reasonable and customary fees to appraisers. The first presumption allows AMCs to evaluate each of six different factors for each appraisal assignment, including property type, scope of work, turnaround time and appraiser qualifications. The second allows AMCs to rely upon objective third-party information, including government agency fee schedules and academic studies/surveys, among others. AMCs that demonstrate that they used one of these methods to establish their fees is presumed to be in compliance with federal law and would therefore in compliance with the new state law.
 
The new guidance also states that the Appraisal and Inspection Fees Schedule for North Carolina published by the U.S. Department of Veterans Affairs is one of many different tools and resources an AMC can use to establish a presumption that they are in compliance with the requirements for the payment of reasonable and customary fees contained in both federal and state law.
 
Find a copy of the guidance document online. 
 
 
Residents of Dania Beach, Florida, on Nov. 8 rejected Amendment 8, which would have altered the City Charter and eliminated a requirement stipulating that only appraisers with the Appraisal Institute’s MAI designation can be hired to appraise the city’s real estate. Fifty-nine percent of voters opposed the initiative. 
 
When this issue first qualified for the November ballot, the Appraisal Institute’s South Florida Chapter developed an action plan to oppose this initiative. They created a promotional piece that stated a “No” vote would help ensure that the city continued to protect its taxpayers by utilizing the most competent and qualified appraisers with the most education, experience and integrity. The chapter also handed out leaflets on election day. 
 
Following the election, former Dania Beach Councilman Walter B. Duke III, MAI, stated, “Our efforts were particularly important given that voters voted overwhelmingly “Yes” for 8 out of 10 amendments. In my opinion, had we not intervened, the voters would have also approved Amendment 8.” 
 
 
Kentucky Gov. Matt Bevin on Dec. 2 issued an executive order that restructured and reorganized the state’s four real estate boards, including the Real Estate Appraisers Board. 
 
The existing REAB was abolished and replaced with a new, three-member board, none of whom are real estate appraisers. The members of the former REAB will serve as non-voting, ex-officio members of the new REAB until their term expires. Gov. Bevin justified the action by citing the U.S. Supreme Court’s decision in North Carolina Board of Dental Examiners, and the need for the state to “enjoy state-action antitrust immunity.” 
 
The executive order also created a new, overarching Kentucky Real Estate Authority that is authorized to approve regulatory changes from each of the four real estate boards and recommend regulations for approval by the new Department of Professional Licensing. The new boards each will be responsible for licensing individuals in their respective sectors and also responsible for issuing penalties to licensees. Under the terms of the executive order, individuals may appeal board decisions to the Commissioner of the Department of Professional Licensing, thus applying an additional level of scrutiny to board decisions.
 
View a copy of the executive order.
 
 
During the 2017 legislative sessions, several states will be considering proposals to establish appraiser-specific statutes of limitations. If enacted into law, these proposals would limit the amount of time after an appraisal is completed that a complaint can be filed against an appraiser related to their work. 
 
Only a few states currently have statutes of limitations specific to appraisal work. In most states, the statutes of limitations apply to the type of claim being pursued (i.e., professional negligence, fraud, breach of contract). In many of those states, complainants have a period of time (usually one to three years) after which an alleged defect in an appraisal is discovered to file a complaint against the appraiser — which can be many, many years after the valuation service was performed. 
 
There has been a flurry of cases filed against appraisers recently in relation to appraisals that were performed as long ago as 15 years. With the Uniform Standards of Professional Appraisal Practice’s five-year Record Keeping Rule, it is nearly impossible for the appraisers to defend themselves against very old claims. Fortunately, most of these cases have been dismissed on other grounds. However, they highlight the need for states to have appraiser-specific statutes of limitations that are consistent with USPAP’s Record Keeping Rule. 
 
Look for updates on these legislative initiatives in future editions of Washington Report and State News. 
 
 
The Missouri Real Estate Appraisers Commission on Dec. 6 heard testimony on proposed legislation that would amend the Missouri Real Estate Appraisers law to allow state-licensed and state-certified appraisers to utilize standards other than the Uniform Standards of Professional Appraisal Practice when performing certain types of valuations. 
 
The proposed legislation also would allow state-credentialed appraisers to perform non-USPAP compliant evaluations for mortgage lending transactions when an appraisal is not required. 
 
Representatives from the Appraisal Institute’s Greater St. Louis and Kansas City chapters testified in support of the proposal, along with staff from the AI’s Washington office. 
 
In their testimony, AI representatives stated, “Appraisers should be able to provide any and all valuation products — from appraisals to evaluations to consulting — using the same standards that non-appraisers are able to use, when allowed under Federal and State law. Appraisers should compete on a level playing field, and be allowed to bring to bear our superior training, skills and independence.” They also noted, “Disruptive change is coming to the valuation profession, whether we like it or not. Appraisers need to shape their future as much as they can.”
 
Look for updates on this important legislative development in future editions of Washington Report and State News. 
 
 
The Massachusetts state legislature is considering SB 2377, legislation that would make it mandatory for individuals to be licensed appraisers in order to offer an opinion of the value on real estate in the state. 
 
Currently, an appraiser license only is required for appraisers to provide services for federally related transactions or as a state-licensed or state-certified appraiser. The bill already has passed the Senate and currently is pending in the House of Representatives. 
 
Read more about SB 2377.
 
 
Legislation is pending in New Jersey that would establish a comprehensive oversight and registration program for appraiser management companies. The Assembly version of SB 2401/AB 1973 already has passed and is pending in the Senate. However, amendments were made in the Senate, so the bill will need to go back to the Assembly at the appropriate time. 
 
See more on SB 2401/AB 1973.
 
 
Multiple states are developing comprehensive legislation or updating existing legislation that governs appraisal management companies operating in their state. 
 
States with active AMC legislation include California, Florida, Indiana, Maine, Michigan, Montana, Nebraska, Nevada, New York, Ohio, South Carolina, Texas and Wisconsin. 
 
Look for updates on these states in future editions of the Washington Report and State News.
 
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