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Q4 Washington Report

October 17, 2016

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                                                                                

The Appraisal Institute in an Aug. 10 letter to Rep. Kurt Schrader, D-Ore., expressed its support of HR 5813, legislation that would require a three-year phase-in of new overtime regulations issued by the U.S. Department of Labor. It also would halt index increases of the threshold level.
The DOL issued its final overtime rule May 18, and Schrader, along with Reps. Jim Cooper, D-Tenn.; Henry Cuellar, D-Texas; and Collin Peterson, D-Minn.; introduced HR 5813, the Overtime Reform and Enhancement Act, July 13.
The DOL rule, which likely will impact many valuation firms, increases the number of employees eligible for overtime pay by extending the threshold for exempt white collar employees to $47,476. The rule is complicated by the fact that DOL has not clarified the status of many professions — including appraisers — or whether they fall under professional or administrative exemptions. The Appraisal Institute met with DOL officials on this issue and learned there is no process to confirm employee status because each case is unique and fact-specific.
Additional legislation (HR 6094, introduced by Rep. Walberg, R-Mich.) was introduced Sept. 21 to delay implementation of the overtime rule for six months; it may be added to a legislative package for Congress to consider before recess. 
The House Financial Services Committee on Sept. 13 approved legislation that would repeal and replace the Dodd-Frank Act, eliminate taxpayer bailouts of financial institutions and provide regulatory relief for community financial institutions.
Congress passed the Dodd-Frank Act in 2010 to improve accountability and transparency in the financial system, and to put an end to banks that are considered “too big to fail.” Numerous rules still are being written by regulators, and many real estate and banking industry groups have expressed concern about regulatory overreach. 
The Appraisal Institute encouraged Congress to consider including appraisal regulatory modernization language in the sweeping legislation and to reconsider a section on bank examination requirements because it raises safety and soundness concerns.
Find more information on the Financial CHOICE Act.

IN THE AGENCIES                                                                       

Federal bank regulatory officials in recent testimony before Congress and in public presentations have signaled an intent to pursue proposals that would increase appraisal threshold levels and potentially establish new exemptions from appraisal requirements. 
Federal Reserve Chair Janet Yellen told the House Financial Services Committee Sept. 28 that federal banking agencies have identified a need to reduce appraisal requirement burdens. The finding followed a review by the agencies of the Economic Growth and Regulatory Paperwork Reduction Act to find outdated, burdensome or unnecessary provisions. Among the issues identified were a need to streamline the Call Report, reduce examination frequency, raise long-standing dollar-based thresholds for appraisals and reduce the complexity of capital requirements for smaller banks. 
Jerome Powell, governor of the Federal Reserve Board, mirrored Yellen’s comments in a Sept. 29 speech before the Conference of State Bank Supervisors where he indicated that efforts were underway to “reduce burden associated with our real estate appraisal requirements.” 
The agencies are in the process of finalizing a report on their Paperwork Reduction Act findings, and any proposals would most likely follow shortly thereafter and could be released by the end of the year. 
Another variable that may be addressed in future proposals is the qualification requirements for individuals performing evaluations. Earlier this year, the agencies released guidance on Supervisory Expectations for Evaluations. Evaluation quality is likely to be heavily scrutinized under any plan to reduce appraisal requirements. 
The Appraisal Institute hosts an Appraisal Threshold page devoted to this issue, in anticipation of proposals that would negatively impact safety and soundness.
The current bank regulatory environment has made portfolio valuation increasingly important and created multiple opportunities for valuation professionals to serve the financial sector, the Appraisal Institute reported Oct. 17.
The 2010 Interagency Appraisal and Evaluation Guidelines devoted an entire section to the issue, and this issue has been reemphasized in newly released guidance statements on risk management in commercial real estate lending. Portfolio valuation also is common amongst other financial institutions involved in real estate (pension funds, insurance companies).
Banks are obtaining a variety of valuations (appraisals and evaluations) in an effort to monitor portfolios and track loan performance. Given the different valuation methods being used, AI expects that bank risk management professionals may begin to ask questions about why they should give more credence to new evaluations than to older appraisals on file. When values are based on different valuation methods, trustworthiness cannot be measured on an apples-to-apples basis. 
Banks and other financial institutions handle portfolio analysis in a variety of ways to address different policy and regulatory needs. This frontier is relatively new and rapidly evolving within banks, and there are no consistent or established best practices. 
As a result, opportunities exist for appraisal professionals to develop forensic tools to evaluate values over multiple time intervals in an attempt to measure value change rather than just value. However, a growing concern is whether current practice standards combined with antiquated federal and state regulation may hinder appraisers from developing new analytical tools. These hindrances also may deter valuation professionals from trying to seize this opportunity to serve the financial sector. 
Through its current advocacy efforts, including a call for additional standards recognition in specific states and modernization of the appraisal regulatory structure, AI is striving to proactively encourage appraisal professionals to seize opportunities to serve the financial sector.  
The banking sector is on high alert as the Basel Committee on Bank Supervision expects to finalize its new accord (Basel IV) by the end of the year, the Appraisal Institute reported Oct. 17. The Second Consultation Document, which was released for comment in March, pays significant attention to real estate risk requirements, including real estate valuation. 
The so-called “Basel Accords” are issued by the Bank for International Settlements and establish regulatory capital requirements that bank regulatory agencies around the world have committed to following.
For exposures secured by real estate, the accord proposes to use the loan-to-valuation ratio as the main driver for risk-weighing purposes, and to use a three-category classification (from less risky to risky) as follows: 
  • General treatment for exposures secured by real estate where repayment is not materially dependent on rent/sale of the property; 
  • A more conservative treatment for exposures secured by real estate where repayment is materially dependent on cash flows (i.e. rent/sale) generated by the property. Specialized lending (corporate) exposures assigned to “income-producing real estate” under the IRB approach would be classified under this category; and
  • A conservative, flat-risk weight for specialized lending real estate exposures defined as “land acquisition, development and construction” (i.e. loans for unfinished property that meet the definition of specialized lending). 
The proposed accord also includes the most extensive commentary relating to real estate valuation of any current accord, and includes a provision directly relating to market value: 
Value of the property: the valuation must be appraised independently using prudently conservative valuation criteria. To ensure that the value of the property is appraised in a prudently conservative manner, this value must exclude expectations on price increases and must be adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan. National authorities should provide guidance setting out prudent valuation criteria where such guidance does not already exist under national law. If a market value can be determined, the valuation should not be higher than the market value.
These market value constructs appear consistent with current bank regulatory requirements in the U.S., with one exception. The “life-of-loan” concept is new to U.S. bank regulatory requirements and could be interpreted to include “long-term sustainable value,” which is found in accords used in other parts of the world, including Europe. 
As noted, the Basel IV accords are expected to be finalized in the coming months. U.S. banking trade organizations such as the American Bankers Association have called on banking regulatory agencies to release a notice of proposed rulemaking for any changes to the risk capital requirements to help avoid piecemeal application and increased complexity. Once finalized, expect implementation of Basel IV provisions in the U.S. to take considerable time.
The Internal Revenue Service on Aug. 4 issued a proposed rule that would greatly impact estate and gift tax transfers where there are liquidations of partial interests. If adopted, the proposal would prohibit discounts of family-controlled entities, including limited liability companies. 
The IRS is proposing to eliminate discounts for marketability and control from estate, gift and generation transfer tax treatment, which would have the practical effect of increasing the taxable amount of the estate/gift/transfer. Similar proposals have been found in recent administration budget requests, but where this proposed rule differs is in its utilization of existing regulatory authority under Section 2704 of the Internal Revenue Code. 
The proposed rule has drawn attention on Capitol Hill, with various groups calling on Congress to take steps to curtail the proposal or take steps to prohibit it from being implemented. A couple of legislative proposals already have been introduced, and tax oversight committee leaders have indicated interest in halting the rule under a stand-alone bill, an appropriations rider or a disapproval resolution under a congressional review law. 
Designated Members of the Appraisal Institute involved in tax valuation have reported strong demand for services because the proposed rule has set forth a series of unknowns for estate and trust tax planners. 
“Politically, this has a long way to go, including a legal challenge when and if the regulation is adopted,” said Michael Zarefsky, former IRS Estate and Gift Appeals Officer and current estate tax attorney in California. “That would be years from now when an estate challenges the regulations.” 
The AI Government Relations Committee has reviewed the proposed rule and sees the proposed changes as legal and tax issues and generally not valuation issues. AI is positioned to provide guidance on valuation issues arising from any final rule. 
Comments are due Nov. 2.  
Citing “a host of serious consumer protection concerns,” the Appraisal Institute joined 10 other trade associations to submit a letter Aug. 16 to the U.S. Department of Housing and Urban Development and the U.S. Department of Veterans Affairs stating their opposition to recent changes to Property Assessed Clean Energy loans, known as PACE loans. 
PACE loans allow local governments to provide financing for energy efficiency, renewable energy and water efficiency projects that building owners pay back through property tax assessments, according to the National Conference of State Legislatures.
“Our associations support responsible efforts to provide homeowners with affordable and accessible financing for energy efficient home improvements, and sounder alternatives to the FHA’s and VA’s new PACE guidelines already exist,” the groups wrote in the letter to HUD Secretary Julian Castro and Veterans Affairs Secretary Robert A. McDonald.
“We urge you to suspend the applicability of the proposed FHA and VA PACE guidelines and issue the proposal for notice and comment so that lenders, borrowers, home improvement providers, and others may be given the opportunity to comment and assist the departments in establishing policies that better protect consumers, lenders and taxpayers.”
On Sept. 30, the FHA released a revised Handbook 4000.1 implementing FHA PACE requirements. The revision states that in cases where the mortgagee determines the property will remain subject to a PACE obligation, the mortgagee must notify the appraiser and provide the appraiser with all terms and conditions of the PACE obligation. AI has the entire Handbook 4000.1 under review and intends to comment separately to FHA on enhancements that require further attention.    
The U.S. Department of Veterans Affairs in July launched an appraiser recruitment drive to increase the size of its Fee Panel. The VA said it has openings throughout the country, but also is targeting specific counties and states identified in its recruitment flyer
To be considered, appraisers must have a minimum of five years’ residential appraisal experience and have at least two letters of recommendation from fee appraisers. Also, conflicts of interest must be avoided. For a complete list of requirements, visit the VA website. Applications can be submitted online. 
The Appraisal Institute on July 15 submitted a comment letter to the Appraisal Subcommittee that was critical of the ASC’s lack of appraiser outreach prior to the release of a proposed rule on appraisal management company registration that could lead to increased costs to appraisers. 
The proposed rule stated that the affected parties would be 400 to 500 active AMCs; however, AI estimated the rule will indirectly impact the 15,000 to 25,000 appraisers who work for AMCs as sole proprietorships. This number is the one that should be used for the Regulatory Flexibility Act. If a larger review had been performed, the ASC would have been more aware of the proposed rule’s financial impact on small businesses. AI also noted that the proposed rule lacks an estimated revenue projection. The ASC could receive a sizable windfall at the expense of small businesses.
In its comment letter, AI wrote, “Congress granted the authorization of AMC registry fees on the presumption of the development of a grant program to state appraiser regulatory agencies. To date, the ASC has chosen not to develop such a program.” 
The letter further stated, “Absent a defined program that benefits consumers, the users of appraisal services and appraisal practitioners, we believe the ASC should establish a cap to the AMC registry fee.”
The ASC may release a final rule by the end of the year.
The U.S. Department of Housing and Urban development on Sept. 14 released new rules on fair housing that list prohibited conduct and establish methods for evaluating claims of quid pro quo harassment and hostile environment harassment. The rule takes effect Oct. 14. 
The rule applies to valuation professionals by prohibiting the use of an appraisal where the person “knows or reasonably should know that the appraisal improperly takes into consideration race, color, religion, sex, handicap, familial status or national origin,” as well as “conditioning the terms of an appraisal of residential real property … on a person’s response to harassment because of race, color, religion, sex handicap, familial status, or national origin.”
President Obama on June 22 signed into law the Indian Trust Asset Reform Act (ITARA) Public Law 114-178, which will provide Indian tribes greater self-determination in their business dealings. 
Title III of the Act requires appraisals and valuations of Indian trust property to be administered by a single administrative entity within the U.S. Department of the Interior, which will establish minimum qualifications for individuals to prepare appraisals and valuations of Indian trust property and allow an appraisal or valuation by a qualified person to be considered final without being reviewed or approved by DOI. 
DOI held listening sessions and established a public comment period before implementing the new law. The Appraisal Institute weighed in during the comment period and encouraged DOI to establish strong minimum requirements for appraisers (particularly in light of the lack of review) and to include standards obligations for any appraisals. 
The comment period for the proposal ended Oct. 7. View AI’s comment letter and see updates for the implementation of the new law.

AT THE STANDARDS SETTERS                                                 

The Appraisal Institute on June 30 commented on two proposals from the International Valuation Standards Council, specifically addressing proposed changes to the International Valuation Standards and the proposed International Professional Standards. 
In its letter, AI provided a range of suggestions relating to IVS, and highlighted differing approaches to standards development, observing that IVS includes methodology and guidance in addition to standards. AI was critical of the proposed IPS, expressing concern that the proposal would create confusion about the differences between appraisal standards and appraiser qualification criteria and professional accreditation programs. 
The Real Estate Roundtable announced Sept. 9 that it led a real estate industry comment letter to the Appraisal Practices Board stating concerns about its first draft of the “voluntary” guideline Valuation of Green and High Performance Property: Commercial, Multifamily and Institutional Properties.
Industry groups joining The Real Estate Roundtable in signing the letter were the National Apartment Association, the National Association of Home Builders, NAIOP, the Building Owners and Managers Association International and the National Association of Real Estate Investment Trusts. 
In its letter, the coalition noted several “significant” concerns about the draft, including:
  • The need for closer consultation with facilities engineering and management experts to better guide an appraisal standard based on a building’s actual energy efficiency performance.
  • The need for appraisers to “dig deeper” into a building’s sustainable features instead of assuming that a LEED rating or other certification automatically serves as a proxy for higher property values. 
  • The need for a thorough review of high-performance tenant-leased spaces within commercial buildings that may positively impact an asset’s appraised value — particularly considering an anticipated “Tenant Star.”
Read the real estate coalition’s comment letter.

IN THE STATES                                                                            

The nation’s 7,382 state legislators are expected to consider about 150,000 pieces of legislation in 2017, with approximately 20 to 25 percent eventually becoming law, the Appraisal Institute reported Oct. 17. A majority of state legislatures will go back to work in January for sessions that range from 30 days to many months. Several states (AL, CO, FL, IA, KY, MT, ND, NH, NV, OR and VA) already are accepting pre-filed bills for consideration in 2017. 
The Appraisal Institute tracks approximately 200 pieces of state legislation each year on a variety of topics related to the appraisal profession. The ideas for some of these bills are proactively proposed by AI to address various issues in a state’s appraisal-related laws, while some bills are put forth by other stakeholders and require monitoring and potential action by AI. 
In 2017, AI expects to work on legislation on the following topics: 
  • Statutes of limitations on civil suits against appraisers; 
  • “Dark store” legislation; 
  • New state AMC oversight and registration laws and updates to existing laws; 
  • Allowing for the use of additional standards of valuation practice other than USPAP when performing non-mortgage lending related appraisal work (in ongoing states); 
  • Encroachment on appraisal by alternative products (BPOs, AVMs, etc.); and
  • Licensing issues — eliminating unnecessary background check requirements, improving reciprocity & temporary practice, improving the allegation, complaint and enforcement process, monitoring efforts to change the minimum licensing and certification criteria to match the requirements of the AQB, etc.
Additionally, staff in AI’s Washington office constantly monitor and work with state legislatures to identify any bills, amendments or other proposals that could impact the valuation profession. 
AI chapters and professionals are strongly encouraged to utilize the resources and expertise available in AI’s Washington office when identifying, proposing or responding to state legislative issues. Contact Scott DiBiasio, manager, state and industry affairs, at 202-298-5593;
Additional advocacy resources are available on the AI website
Illinois Gov. Bruce Rauner on Aug. 12 vetoed HB 3333, which would have created the Appraisal Management Company Recovery Fund to provide restitution to state-certified residential and general appraisers who suffered monetary loss as a result of an appraisal management company ceasing operations in Illinois or determined to be bankrupt. 
In his veto message, Rauner stated, “The bill would add another state-imposed fee to an industry that is already regulated and required to pay annual fees. We must be sensitive to the burdens we are placing on Illinois businesses in this economic climate.” He also noted, “The bill would place the state in the position of managing private-sector risks for a specific industry, while eliminating surety bond protection for the state.”
The bill was strongly supported by the Illinois Coalition of Appraisal Professionals. It also was supported by many AMCs, which felt that making payments to the recovery fund would have been easy to manage and would have stopped once the fund reached $500,000. The bill would have provided the same protections to the state as the surety bond by allowing the state to make a claim to the recovery fund in the event an AMC left the state without paying any fees, fines and costs imposed upon it. Interestingly, Illinois already has several similar recovery funds, including the Real Estate Recovery Fund and the Dealer Recovery Trust Fund. 
ICAP currently is meeting with legislators and representatives of the Illinois Department of Financial and Professional Regulation, which would have administered the fund, to resolve some of Rauner’s concerns. They hope to reintroduce a similar bill in a future legislative session. 
View a copy of HB 3333.  View Gov. Rauner’s veto message
California Gov. Jerry Brown on Sept. 30 signed into law Assembly Bill 1381, which requires the state’s Bureau of Real Estate Appraisers to provide online information regarding continuing education courses taken by appraisers. 
The bill was sponsored by Assembly Member Shirley Weber, who stated, “By listing an appraiser's continuing education courses, the public will have a better understanding of who appraises their property. In addition, businesses would be better able to evaluate candidates and select appraisers with certain specializations.”
A previous version of the bill would have required appraisers to obtain qualifying and continuing education in the valuation of sustainable real estate assets, including solar and wind power generation installations and energy-efficiency measures. Appraisal Institute chapters in California, operating collectively as the AI California Government Relations Committee, successfully lobbied for changes to the bill, arguing that it would be inappropriate to impose this type of continuing education requirement on all appraisers because some specialize in the types of appraisals (right of way, for example) where valuing sustainable real estate is not part of their practice. 
Read more on California’s new law, AB 1381
Washington State Reps. Liz Pike and Brandon Vick on Sept. 12 convened a meeting of the Real Estate Appraiser Shortage Legislative Taskforce, which was assembled to help identify challenges that may be contributing to the current shortage of real estate appraisers. 
Taskforce participants, which included congressional members, appraisers, state and local realtors associations, bankers and mortgage brokers, identified several challenges, including the reluctance of appraisers to take on trainees, regulations imposed by the Dodd Frank Act and the economics of the appraisal profession, which can make it unattractive to new entrants. They also identified potential solutions, including establishing an easier pathway to recertifying former appraisers with expired licenses, eliminating the four-year college degree requirement for licensure and eliminating the licensed appraiser category. 
The Appraisal Institute will report in future editions of Washington Report & State News what steps, if any, the taskforce takes to attempt to alleviate the shortage of qualified appraisers.
IN THE COURTS                                                                           
The Appraisal Institute on Oct. 17 highlighted two recent court rulings that may be of interest to valuation professionals. 
The first case, US Bank, National Association vs. USB Real Estate Securities, Inc., was filed Sept. 6 in the U.S. District Court Southern District of New York and focused on the use of automated valuation models instead of credentialed real estate appraisers. In this decision, the court rejected exclusive reliance upon an AVM analysis as a basis for recalculating LTV ratio, citing limited utility of an AVM for valuing a particular residential property. 
The second case, Cave Buttes, LLC v. Commissioner of Internal Revenue, was filed Sept. 20 in the U.S Tax Court and weighed in favor of the taxpayer on several issues, including the definitions of qualified appraiser, qualified appraisal and fair market value. 
The Independent Community Bankers of America reported Sept. 7 that it filed a lawsuit against the National Credit Union Administration over its commercial lending rule. The ICBA alleged that the rule would enable tax-exempt credit unions to exceed congressionally mandated limits on commercial lending and reduce regulatory oversight.
By allowing a credit union to exclude from its calculation of the member business loan cap any nonmember commercial loans (loans originated by another credit union to a borrower who is not a member of the credit union purchasing the loan or participation), the NCUA has provided the credit union industry with a huge loophole that can be exploited to increase commercial lending in violation of the law.
The NCUA’s rule is contrary to the plain language of the Federal Credit Union Act, as amended by the Credit Union Membership Access Act. To protect the safety and soundness of credit unions, these laws expressly limit the amount of commercial loans that may be held on credit union balance sheets and clearly define “member business loan” as any commercial loan. The NCUA has not offered a clear explanation for its rule interpretation (that reverses the conclusion it reached more than 15 years ago) that such a lending expansion would lead to “absurd” results and violate the FCU Act. ICBA simply wants the agency to adhere to the law when writing rules.
The lawsuit, Independent Community Bankers of America v. National Credit Union Administration, was filed in the U.S. District Court of the Eastern District of Virginia. Read the legal complaint
The North Carolina Court of Appeals on Sept. 6 affirmed a trial court’s exclusion of a broker price opinion from evidence because it reported market value instead of price. 
In the case before the court, a real estate broker prepared a 124-page BPO that reported the pre-taking value of a 240-unit apartment complex as $15.338 million and a value after the taking of $11,603,733, a difference of $3,734,267. A jury returned a verdict and determined $350,000 was just compensation for damages arising from the taking of the property. The court found that the broker’s report “repeatedly states that it is an opinion of the fair market value of the property … rather than the probable selling price.” The court found that the licensed real estate broker, who was not a licensed appraiser, “is not permitted to prepare ‘a valuation appraisal.’”
The court noted that the state’s Real Estate Licensing Law allows a real estate broker to prepare a broker price opinion or comparative market analysis and to receive a fee for that service. A BPO or CMA is defined in statute as “an estimate … that details the probable selling price or leasing price of a particular parcel of or interest in property.” The statute also states, “A broker price opinion or comparative market analysis that estimates the value of or worth … rather than sales or leasing price shall be deemed to be an appraisal and may not be prepared by a licensed broker … and may only be prepared by a duly licensed or certified appraiser.”
Read the decision in the case of North Carolina Department of Transportation vs. Mission Battleground Park. 
The case should serve as a strong warning to real estate brokers in North Carolina who violate the law by preparing BPOs and CMAs that report market value rather than price. 
The Washington State Court of Appeals on July 7 ruled in favor of an appraiser and her employer over liability for soured real estate investments. 
In the case before the court, the appraiser performed two appraisals for loans by a bank to a commercial investment/development entity. Over time, the investments soured and the investment entities sued, claiming that in making their purchase decision, they relied on the appraiser’s reports prepared for the bank. The reports, however, stated they could only be used by the bank for the bank’s internal lending considerations. The trial court found, and the appellate court agreed, that the appraiser owed no legal duty to the investors.
The court stated, “An appraiser’s liability for negligent misrepresentation is limited to the person or one of a limited group of persons for whose benefit and guidance he or she intended to supply the appraisal report or knew the recipient intended to supply it.”
Read the decision in the case of RockRock Group, LLC vs. Value Logic, LLC.
TIP LINE                                                                                        
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The Appraisal Institute’s Washington office wants to know if AI professionals have relationships with critical policymakers, or are aware of a burgeoning issue of opportunity or concern. Please contact any member of the AI Government Relations Committee or Washington office staff with more information.  












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