First Quarter 2014 Issue
January 16, 2014
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.
In This Issue
Housing Reform Bills Slow to Proceed
Senate Mulls Additional Legislation on Appraisal Exemptions
ABA Joins AI, ASFMRA in Going Concern Debate
AI Summarizes New Mortgage Disclosure Rule Impacts
AI: Credit Risk Retention Rule Constrains CRE Credit
AIR Certification Statement Not Required
CFPB Releases Manufactured Housing, Appraisal Exemptions Final Rule
Louisiana Approves AMC Rules
National AMC Terminates Independent Contractor Appraisers
AI Participates in 2 AICPA Conferences
AI Questions Need for Alternative Valuation Products White Paper
AI Participates in GASB Hearing on Fair Value Accounting Standards
Conservation Valuation Experts Discuss Alternatives at AI Forum
AI Leaders and Staff Attend AARO Fall Meeting
AI Participates in NAR Annual Conference in San Francisco
Share Your Issues
On Capitol Hill
Housing Reform Bills Slow to Proceed
The Appraisal Institute notes that the PATH Act — the primary housing finance reform bill in the U.S. House of Representatives — appears to have made no progress over the holiday recess.
Reports indicate that Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, has been unable to overcome industry resistance to the bill he authored, and the issue remains in the hands of House leadership who appear unwilling to move the bill to the floor.
AI noted that one possible outcome is that the bill will be broken up into pieces, such as FHA reform, that likely would pass.
“Corker-Warner,” another housing reform bill that AI is monitoring, remains a big priority for the Senate Banking Committee, and work continues on a draft that its members could support. No timetable has been set for committee consideration.
Senate Mulls Additional Legislation on Appraisal Exemptions
The Appraisal Institute anticipates that in the coming weeks a coalition of Senators primarily from rural states will introduce legislation that addresses the concerns that many community banks and credit unions (mostly in rural states) have expressed about a “shortage of appraisers.”
The concern has been raised in several meetings AI has had with Congressional staff, and it mirrors comments advanced by trade groups for community banking and credit unions during recent Congressional hearings. The common complaint is that the alleged appraiser shortage has forced banks to use appraisers from too great a distance and therefore aren’t familiar with the area or the property.
AI anticipates that the Senate bill will propose that properties be exempt from appraisals when a lender is keeping the loans on their books.
In meetings with Congressional staff, AI has pointed out that it generally is good business practice to obtain an appraisal regardless of whether or not one is required. AI also has explained current exemption requirements that already provide banks with ample exemptions — although these can be misunderstood by lenders. Further, AI has emphasized that instead of additional exemptions from appraisal rules, Congress should look at reasons why there might be a shortage of appraisers, such as an increasingly rules-based approach to valuation and increasing appraiser liabilities.
Look for action alerts on this issue, as grassroots education of Congressional offices likely will be helpful.
In the Agencies
ABA Joins AI, ASFMRA in Going Concern Debate
The American Bankers Association joined the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers in calling on the U.S. Small Business Administration to reverse its September policy update related to going concern appraisals, citing increased costs for consumers as an imperative concern. Read the joint AI-ABA-ASFMRA letter here.
The SBA updated its policy related to valuation requirements involving business and intangible assets in situations where there is a change in ownership, a special-use property and a residual business value contribution of more than $250,000 to the loan amount. In those situations lenders are required to obtain a separate business appraisal from an appraiser holding a designation or certification from one of five business valuation organizations; the Appraisal Institute is not one of those organizations.
Many SBA lenders have indicated that they plan to continue to operate as they always have, by obtaining an appraisal of the going concern from a real estate appraiser, and then if the business value is necessary for collateral purposes, using a qualified source for that value. Still, AI is concerned that some SBA lenders could employ an overly-cautious interpretation that may result in conflicts with state mandatory licensing requirements and a limited pool of service providers.
AI professionals are asked to advise AI’s Washington office on how SBA lenders have implemented the new policy. Contact Bill Garber, AI director of government and external relations, at 202-298-5586 or bgarber@appraisalinstitute.org to share your experience.
AI: Credit Risk Retention Rule Constrains CRE Credit
On Oct. 30, 2013, the Appraisal Institute urged six federal bank regulatory agencies to modify a credit risk retention proposal to better address shortcomings in the way in which appraisals are addressed.
AI warned the Board of Governors of the Federal Reserve System, the U.S. Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the U.S. Department of Housing and Urban Development, the U.S. Department of the Treasury and the Federal Housing Finance Agency that the proposal misuses terms relating to capitalization rates that likely will dampen credit to deserving commercial real estate projects.
Read AI’s letter to the regulatory agencies.
CFPB Releases Manufactured Housing, Appraisal Exemptions Final Rule
Six federal agencies jointly issued a final rule Dec. 12, 2013, that amends Regulation Z in the Truth in Lending Act and exempts certain streamlined mortgages and very small loans from appraisal requirements intended for higher-priced mortgages. The Rule goes into effect Jan. 18.
The agencies involved are the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration and the Office of the Comptroller of the Currency.
The new rule stipulates that a written appraisal based on a physical inspection is not required when the principal balance on a loan for purchase or for refinance is $25,000 or less. Additionally, streamlined refinances are exempt from appraisal requirements as long as the loan doesn’t have a negative amortization or interest-only terms, and the credit risk holder remains the same.
Under the rule, new manufactured housing also will be exempt from appraisal requirements until mid-July 2015. Existing manufactured homes with land are not exempt. After the exemption period ends, mortgage loans for new manufactured homes with land will require a written appraisal but not a physical property visit. Loans on manufactured homes without land can be valued by methods other than an appraisal.
In a Sept. 9 letter to the agencies, the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers cautioned against exempting any loans that involve “new risk” or “new money,” a recommendation that was accepted by the agencies. In the same letter, AI and ASFMRA recommended that an appraisal be conducted for any loan secured by a manufactured house that includes the land.
AI Summarizes New Mortgage Disclosure Rule Impacts
On Dec. 17, 2013, the Appraisal Institute released a summary of the Consumer Financial Protection Bureau’s new mortgage disclosure rule, which makes significant changes to the Real Estate Settlement and Procedures Act and to the Truth in Lending Act.
Among the changes is a final rule authorizing the disclosure of appraisal management company fees and a new definition for “changed circumstances,” which more easily allows appraisers to charge a fee commensurate with a changed scope of work.
A copy of the final rule, which goes into effect August 1, 2015, can be found here.
AIR Certification Statement Not Required
The Appraisal Institute’s Washington office confirmed with Fannie Mae that appraisers are not required to sign a certification statement that reads: “The undersigned certifies the appraisal report is in compliance with the Appraisal Independence provisions.”
AI had received several inquiries from lenders about Fannie Mae and Freddie Mac’s Appraiser Independence Requirements, with many expressing frustration that they have been required to sign such a certification statement prior to completing the assignment and when an AIR requirements are imposed on lenders by Fannie and Freddie.
While Fannie reported that it doesn’t require such signed certification statements, it noted that lenders can require overlays as part of their own operating requirements. In the end, this issue quickly becomes a contractual issue between appraisers and their clients.
Fannie Mae recommended that appraisers attempt to engage clients in a dialogue when confronted with such certification statements. For instance, when receiving a request to sign such a certification, appraisers should request clarification for which Appraisal Independence provision is being referenced.
AI professionals are encouraged to keep the AI Washington office informed of such communications.
In the States
Louisiana Approves AMC Rules
The Louisiana state legislature on Nov. 20, 2013, approved a set of appraisal management company rules that provide strong provisions regarding the payment of reasonable and customary fees that were put forth by the state’s appraiser board.
The Louisiana Real Estate Appraisal Board became the first state appraiser board to have authority to make its own administrative determinations as to whether or not an AMC operating in the state has paid an appraiser a reasonable and customary fee.
Some states have laws that stipulate that AMCs must pay appraisers reasonable and customary fees in accordance with the federal presumptions of compliance, but it has been an open question as to whether or not state boards could — or would — enforce the federal requirements for the payment of reasonable and customary fees.
The new Louisiana rules allow for AMCs to use “objective third-party information such as government agency fee schedules, academic studies and independent private sector surveys” as evidence for what constitutes reasonable and customary fees, so long as the fee studies exclude assignments ordered by AMCs.
The rules also allow the state board to develop its own fee schedule that can be used by AMCs, and in instances where AMCs are not using an established fee schedule, the rules require them to justify their fees based on several factors, including property type, scope of work and turn time, as well as the appraiser’s qualifications, experience and work quality.
View a copy of Louisiana’s new AMC rules.
National AMC Terminates Independent Contractor Appraisers
The Appraisal Institute has become aware of one large, national appraisal management company (with a large, national, non-bank mortgage lender as its primary client) that is requiring its panel of appraisers to either be independent contractors who are directly engaged by the AMC or W-2 employees of an approved appraisal company.
In a “Notice of Intention to Terminate Work” letter obtained by AI, the AMC (which will remain unnamed) stated that it “made the decision that it will only pay 1099 appraisers directly for the work they perform, thus, [sic] abandoning the old method of compensation whereby an appraisal company was paid directly for the services their 1099 appraisers were performing.” The company stated that it will allow W-2 employees of an appraisal company to continue to receive appraisal work.
According to sources within the AMC, the termination of independent contractor appraisers was necessitated by a requirement in the Dodd-Frank Act for the payment of reasonable and customary fees to independent contractor appraisers. The source argued that there is no way for the AMC to ensure that the appraisal company is paying a reasonable and customary fee to the independent contractor appraiser who is performing the appraisal service. The fact that W-2 employees of appraisal companies are able to continue to receive work from the AMC is because the Dodd-Frank Act does not require appraisal company employees be paid a reasonable and customary fee.
AI has expressed to the AMC its concern with the termination decision and stated its belief that the Dodd-Frank Act only requires that lenders and their agents (i.e., AMCs) pay reasonable and customary fees to either appraisal companies or to independent contractors who are directly engaged by the AMC (see 15 U.S.C. §1639e(i)).
AI has argued that there is nothing in Section 1639e that requires an AMC to ensure that an appraisal company is compensating any independent contractor that is retained by the appraisal company at a reasonable and customary rate.
At the request of AI, the AMC has agreed to review its termination decision.
Standards-Setting Bodies
AI Participates in GASB Public Hearing on Fair Value Accounting Standards
The Appraisal Institute expressed its support Nov. 1, 2013, for the Governmental Accounting Standards Board’s efforts to modify accounting standards for state and local governmental entities to require the use of a fair value model for the reporting of investments, particularly real estate assets.
AI also encouraged GASB to expand the application of the fair value model beyond the government entity’s real estate assets being held “primarily for the purpose of income or profit.”
Other Letters
Letter Questions Need for Alternative Valuation Products White Paper
On Dec. 30, 2013, the Appraisal Institute commented on The Appraisal Foundation’s White Paper draft titled “Alternative Valuation Products and the Uniform Standards of Professional Appraisal Practice,” questioning the need for a White Paper on valuation products other than appraisals. AI further questioned The Appraisal Foundation’s role in drafting such a White Paper.
“Much of the content of this draft White Paper is related neither to appraisal standards nor to appraiser qualifications, but rather to AVPs prepared by non-real estate appraisers,” AI wrote in its letter. “The tone of the draft White Paper is such that it appears as if TAF is attempting to promote and legitimize the use of AVPs, and is encouraging users of valuation services to consider AVPs when an appraisal is not required by federal law.”
AI also noted that much of the draft White Paper’s content already is covered in Advisory Opinion 13, “Performing Evaluations of Real Property Collateral to Conform with USPAP” and within Advisory Opinion 21, “USPAP Compliance.”
“We do not believe that it is necessary or appropriate for TAF to issue additional ‘guidance’ on alternative valuation products,” AI wrote. “Having such ‘guidance’ on the subject, in the form of a White Paper, will only lead to confusion among appraisers and inconsistent enforcement by state regulators. Our concern in this area is similar to that which we have expressed repeatedly in relation to the Valuation Advisories issued by the TAF Appraisal Practices Board.”
Read AI’s comment letter to The Appraisal Foundation.
Meetings of Note
AI Leaders and Staff Attend AARO Fall Meeting
In October 2013, then Appraisal Institute President Richard L. Borges II, MAI, SRA, and Vice President Lance Coyle, MAI, SRA, along with Scott DiBiasio, AI’s manager of state and industry affairs, participated in the Association of Appraiser Regulatory Officials’ Fall Meeting in which AI met with more than 100 state appraiser regulators from around the U.S.
President Borges led a roundtable discussion during the event in which he addressed appraiser experience training requirements and encouraged state regulators to look at alternative methods in which trainee appraisers can satisfy the appraiser experience requirements.
Additional conference sessions focused on AMC regulatory issues, review appraisal requirements and updates from federal appraiser regulatory agencies and standards setting bodies. The next AARO conference will be held in April in San Francisco.
Appraisal Institute Participates in 2 AICPA Conferences
In early November 2013, Appraisal Institute staff participated in the American Institute of Certified Public Accountants’ Real Estate and Forensics & Valuation conferences. The two conferences provided an opportunity for AI to encourage accounting professionals to utilize Appraisal Institute members when they need real estate valuation services.
AI members Michael Hedden, MAI, and E.J. Huntley, MAI, separately made presentations at the AICPA Real Estate Conference entitled “Disaster Relief in Real Estate” and “Fair Value in Real Estate.”
AI Participates in NAR Annual Conference in San Francisco
On Nov. 8, then Appraisal Institute President Richard L. Borges II, MAI, SRA, joined Sandy Adomatis, SRA, to present a panel discussion at the National Association of Realtors Conference & Expo in San Francisco. Real estate professionals in attendance for their presentation, titled “Working Together on High-Performance Homes,” received a copy of AI’s Residential Green and Energy Efficient Addendum.
Conservation Valuation Experts Discuss Alternatives at AI Forum
Participants in the Appraisal Institute’s Dec. 9 stakeholders forum in Washington, D.C, assessed alternatives to the current tax processes involving donations of conservation easements. AI sponsored the one-day event, which addressed a variety of conservation valuation issues.
Participants considered the system of valuation panels utilized in Canada for ecological gifts and various forms of alternative dispute resolution. Such alternative systems would potentially save significant time and money for taxpayers and the Internal Revenue Service, if structured correctly, land trust and appraiser representatives said.
Representatives of the land trust and conservation organizations, federal agencies involved with conservation and significant land use projects and professional appraisers were among the participants of the forum, which identified concerns of stakeholders to the real estate appraisal process and methods to improve appraisal practice in conservation valuation.
During the forum, federal agency representatives generally reported high performance levels among appraisal service providers, but noted a need for more consistency and understanding in such things as identification of the “larger parcel” and highest and best use in federal land acquisitions. Donor and land trusts reported concern with inconsistent agency rules and interpretations relating to appraisal requirements for federal conservation programs, in addition to concerns with high costs and extensive time involved in defending donations of real property for conservation purposes before the IRS and U.S. Tax Court.
Attendees made suggestions for preferred approaches to help improve conservation valuation practice in the areas of education, guidance and policy.
Tip Line
Share Your Issues
Do you have relationships with critical policymakers, or are you 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.