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Q4 2017 Washington Report

Oct. 19, 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                                                                                

The Appraisal Institute’s Washington office monitors Capitol Hill activity that’s important to valuation professionals. Here are updated Oct. 19 on a few noteworthy items: 
 
GSE reform. Legislation to reform the government-sponsored enterprises has not been introduced in the House or Senate because both chambers are focused on other priorities, such as flood insurance and Dodd-Frank fixes. While there was a Senate hearing on Fannie Mae and Freddie Mac in June, GSE reform likely will take a back burner to tax reform, and the issue might not see any action until early 2018. 
 
Appraisal regulatory modernization. The Appraisal Institute continues to push for modernization of the U.S. appraisal regulatory structure, highlighting for Congress the benefits of one-stop-shopping for appraisal licenses and renewals. Currently, institutionally employed appraisers (which account for roughly 8 percent of licensed appraisers) must navigate a labyrinth of license application processes that even include background checks in some states — even for temporary practice permits. A nationwide licensing platform would dramatically reduce the regulatory burden for basic license application and renewals for both appraiser practitioners and institutions employing appraisers. 
 
Federal role in appraisal. The Appraisal Institute clarified its position on the federal role in appraisal, stating that it has not proposed eliminating a federal role altogether, suggesting instead that the role should be that of a backup authority or a last resort. AI believes that state appraiser regulatory agencies would carry out licensing processes as they have for the past two decades and that these efficiencies will help reduce the layering effect that foists costs and obligations on practitioners. 

The House Committee on Financial Services included appraisal in its oversight plan, and AI continues to hear talk about the committee possibly addressing appraisal issues later this year or early next year.

House panel passes third-party appraisal bill. The House Committee on Veterans Affairs on Oct. 12 passed HR 3561, legislation that gives VA appraisers the ability to rely solely on information from approved third parties — such as an appraisal trainee or property inspector under the direction of a VA appraiser — when determining a home’s value for a VA loan. The bill’s sponsors reportedly intend for it to address timeliness issues with some appraisals in rural areas.
 
The Appraisal Institute in a letter to bill sponsors recommended a different approach. AI suggested that, instead of allowing third-party inspections, the VA should be more aggressive in recruiting appraisers to address timeliness issues. AI also recommended the legislation be tightened to “support the use of appraiser trainees over non-appraiser property inspectors, and for the program to be limited to its intent of dealing with rural appraisal situations.”
 
Next up for HR 3561 is a vote on the House floor, but no date is set.
 
High-volatility commercial real estate. The House Financial Services Committee on Oct. 12 approved HR 2148, legislation to clarify and reform Basel III High Volatility Commercial Real Estate rules issued by the federal bank regulatory agencies relative to acquisition, construction and development loans, known as ADC loans. 
 
HR 2148 would help ensure that HVCRE requirements are appropriately calibrated and do not impede credit capacity or economic activity. The bill would exclude from the definition of HVCRE ADC loans any commercial real property projects in which the loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the appropriate federal banking agency and where the borrower has contributed capital of at least 15 percent of the real property’s appraised “as-completed” value to the project in the form of cash, unencumbered readily marketable assets, paid development expenses out of pock or contributed real property or improvements. 
 
Meanwhile, the banking regulatory agencies, namely the Office of the Comptroller of the Currency, the U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, published on Sept. 27 a Notice of Proposed Rulemaking entitled Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996.
 
The Notice of Proposed Rulemaking would replace the current HVCRE rule with a newly defined exposure category called high-volatility acquisition, development or construction. The proposal aims to simplify the capital treatment of ADC loans by expanding the number of ADC loans subject to a higher capital charge while reducing the size of the capital charge for covered loans from 150 percent to 130 percent. Despite the lower capital charge, some banks may be required to carry more capital for ADC loans than what is currently required. Whether the new approach results in simplification remains to be seen.
 
Regulators are soliciting comments on whether the new approach is workable and appropriate. Comments are due within 60 days of the NPR being published in the Federal Register.
 
 
The Appraisal Institute on Sept. 6 joined with nearly three dozen appraiser organizations in asking Congress to call on the Federal Housing Finance Agency to prevent Freddie Mac and Fannie Mae from issuing appraisal waivers.
 
The government-sponsored enterprises recently announced plans to no longer require appraisals for first purchase loans, as well as for mortgage refinancing. The Appraisal Institute is among 35 appraisal groups seeking to prevent FHFA from implementing the appraisal waiver program until the GSEs can demonstrate that the program:
  • Is consistent with safe and sound operation of Freddie and Fannie;
  • Does not bring harm to the consumer, especially the affordable housing sector;
  • Is properly monitored by FHFA and tested with independent appraisals; and
  • Integrates proper safeguards to prevent fraud.
In a letter to the chairs and ranking members of the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee, the Appraisal Institute wrote, “We recognize that the Enterprises have, since 1994, been exempted from appraisal requirements established by Congress on the basis that their requirements exceeded those established by Congress and that they would continue to make responsible decisions. These new programs call this privilege into question.”
The Appraisal Institute warned of an “arms race” between Freddie and Fannie that would result in “a race to the bottom in terms of due diligence.”
 
“Unlike an earlier policy change by Fannie Mae, which addressed mostly refinances where previous appraisal information is likely available, first purchase transactions by the Enterprises carry higher risk from a property information standpoint,” the Appraisal Institute told Congress. “It is standard underwriting practice to obtain a complete interior inspection appraisal for first purchase transactions in order to better understand the potential risk associated with a property condition, which is more likely to change between subsequent sales than between refinance transactions.”
 
The Appraisal Institute noted, “It has taken many years for the mortgage finance sector to recover from the financial disaster in 2008-09, but progress has been made. The significant progress is due in large part to the employment of fundamental risk-management activities, such as the requirement for the completion of full appraisals to determine the true equity position of individual properties. Reducing appraisal requirements sends the wrong signal to mortgage loan sellers about the importance of fundamental risk-management practices and the need to continue to employ strong underwriting guidelines to avoid the costly mistakes of the recent past.”
 
The Appraisal Institute offered some suggestions to Congress and to the FHFA: “At a minimum, the Agency should request the estimates of the number of loan purchase and refinance transactions that would be subject to the new programs and make those estimates public for comment by affected stakeholders and other experts.”
 
“Further, as your Committee develops housing finance reform legislation, we ask that any legislation ensures that the Enterprises’ appraisal requirements enhance their safe and sound operation so long as the Enterprises remain in conservatorship or otherwise present potential risks to taxpayers and homeowners.”
 
What you can do? AI is asking its professionals to contact Congress to urge them to prevent the Federal Housing Finance Agency from letting Fannie Mae and Freddie Mac implement appraisal waiver programs until there’s proof the programs are consistent with safe and sound operations. 
 
AI talking points regarding the appraisal waivers are available online, as is a directory of senators and representatives. 
 
 
The White House and Republican leaders of the congressional tax writing committees on Sept. 27 released the “Unified Framework for Fixing Our Broken Tax Code,” which outlines proposed tax reform plans. 
 
The plans were developed by officials referred to as “the Big Six,” a group that includes Senate Majority Leader Mitch McConnell (R-Ky.); Senate Finance Committee Chairman Orrin Hatch (R-Utah); House Speaker Paul Ryan (R-Wis.); House Ways and Means Committee Chairman Kevin Brady (R-Texas); Treasury Secretary Steven Mnuchin; and National Economic Council Director Gary Cohn.
 
The framework, which still lacks significant details, likely would impact real estate in multiple ways. 
 
Changes for individuals would involve:
  • Doubling the standard deduction for married and single filers; 
  • Eliminating most itemized deductions but retaining tax incentives for home mortgage interest and charitable contributions. The framework does not specifically mention state and local tax deductions, which likely are at risk; and 
  • Eliminating the estate tax.
Changes for businesses would involve:
  • Limiting to 25 percent the maximum tax rate applied to the business income of small and family-owned businesses that are operated as sole proprietorships, partnerships and S corporations (collectively referred to as “pass-through” entities). The tax-writing committee would define business income and small and family-owned businesses; 
  • Reducing the corporate tax rate to 20 percent and moving toward reducing the taxation of corporate earnings; 
  • Allowing immediate write-off or expensing for at least five years of the cost of new investments in depreciable assets other than structures made after the date of the proposed framework document; and   
  • Maintaining low-income housing tax credit.
The business section also states that special tax regimes exist to govern tax treatment of certain industries and sectors and indicates that the framework would modernize these rules to ensure the tax code better reflects economic reality and eliminates opportunities for tax avoidance. 
 
Changes that address global competitiveness involve:
  • Ending incentives for offshoring operations by treating foreign earnings that were accumulated overseas under the old system as repatriated and replacing the current structure with a 100 percent exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10 percent stake; and 
  • Taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.
Many real estate companies operate under LLC arrangements, so they potentially could benefit from a reduced tax rate. On the other hand, reduced corporate tax rates might give corporations some pause in evaluating conversion to real estate investment trusts. Further, service industries, including real estate appraisal, should pay close attention to the applicability of the pass-through rate of 25 percent, as administration officials implied that it might not apply to professional service firms. 

 
IN THE AGENCIES                                                                       
 
The comment period on the proposed rule to increase the commercial real estate appraisal threshold level closed Sept. 28, and the federal bank regulatory agencies received 70 comments. The Appraisal Institute and the American Society of Farm Managers and Rural Appraisers jointly submitted their opposition to the proposed increase.
 
Most of the comments were submitted by practicing real estate appraisers who oppose the increase and expressed concern about increased risk to the CRE market. They also challenged the use of existing appraisal threshold levels as the basis for inflationary increases and opposed the inclusion of construction loans for multifamily properties with four or fewer units.
 
However, state banking organizations and the organizations representing financial institutions expressed support for the increased CRE appraisal threshold level. Most also either expressed support for or called for further study of an increase to the appraisal threshold level for residential and business loans. AI and ASFMRA strongly oppose such an increase.
 
Notable comments from national industry organizations:
 
The National Association of Realtors agreed with the agencies, stating that an increase to the CRE appraisal threshold is “appropriate at this time.” NAR said an increase to $400,000 represented an appropriate assessment of inflation since the threshold was last raised, noting that “the value of commercial transactions has increased such that the number of commercial properties that this increase will affect does not undermine the safety and soundness of the commercial real estate market.”
NAR did not support an increase in the residential appraisal threshold at this time.
 
The National Association of Home Builders supported a CRE threshold increase as part of the “efforts to identify areas where regulatory burden can be reduced without negatively impacting safety and soundness.” NAHB wrote that the increase would especially benefit construction loans made to small builders who are “more disproportionally impacted by added financing costs.”
Additionally, NAHB encouraged the agencies to continue reviewing a possible increase to the residential appraisal threshold “to see if more flexibility could be provided to lenders with sound underwriting criteria and processes in place.”
 
The American Bankers Association supported the CRE increase, writing “it will provide immediate relief to the challenges faced by banks as they traverse the current shortage of appraisers and lengthening of turnaround times in the industry. This solution would also address increased costs associated with small-dollar transactions for small business owners.” Additionally, ABA said it believes the increase is “consistent with safe and sound banking practices” since an evaluation of real property will still be required. 
 
Regarding the residential threshold, ABA “encourages the agencies to engage in much deeper consideration of increasing the threshold.” The organization stated, “accurate valuation tools are readily available and currently utilized by regulated banks. Our members currently perform valuations for residential portfolio transactions, home equity loans and routine asset quality reviews. These valuations adhere with the interagency guidelines and are assessed by the prudential regulators during safety and soundness examinations.”
 
All comments submitted to the federal bank regulatory agencies about the proposed appraisal threshold increase are posted online for review. Each comment must be considered by the agencies when issuing a final rule. The agencies have not indicated how they will proceed with a final rule, but interagency rulemaking typically requires significant legal and administrative review. 
 
 
The Appraisal Subcommittee on Sept. 25 published the final rule on the Collection and Transmission of Annual Appraisal Management Company Registry Fees, which establishes the formula for transmitting registry fees to the ASC by states that elect to register and supervise AMCs. The Appraisal Institute reiterated its concern about the final rule.
 
The final rule is expected to generate millions of dollars in annual AMC registry fees, which are intended to support the development of the new National Registry and to fund grants that will help states with enforcement. The ASC also said it intends to use the fees to support related and undefined Title XI activities.
 
Fees for AMCs in states that require them to register and be supervised will be assessed as follows:
  • AMCs in business for more than a year will pay $25 for each appraiser who performed an appraisal for the AMC on a covered transaction in the state during the previous year.
  • AMCs in business less than a year will pay $25 for each appraiser who performed an appraisal for the AMC on a covered transaction in the state since the AMC commenced doing business.
The final rule was developed and finalized over the objections of the Appraisal Institute and many other industry participants that expressed concern that the AMC Registry Fee rule, as constructed, could hurt small businesses and result in an additional “tax” on small appraisal firms.
 
The ASC responded to the concerns, stating that it was constrained by the Dodd-Frank Act to assess AMCs based on a $25 per-appraiser formula, and that it had no authority to prohibit an AMC from passing the registry fee to the appraiser. The ASC also stated that the Regulatory Flexibility Act does not require an agency to conduct a small-entity impact analysis if the agency does not regulate the affected entities (AMCs, lenders, appraisers), and that its statutory oversight extends only to state-certifying and licensing authorities.
 
The Appraisal Subcommittee announced Sept. 20 that it is seeking public comment on its proposal to revise policy statements. The revisions include edits made for consistency and a new section on appraisal management company minimum requirements — which was largely taken from the recent final rule on AMC minimum requirements. 
 
Comments are due Nov. 20.

IN THE STATES                                                                            

California Gov. Jerry Brown on Oct. 2 signed SB 547, legislation that makes favorable changes to the state’s existing appraisal management company oversight law. The law takes effect Jan. 1 and is intended to bring the state into compliance with the minimum federal requirements for states that adopt AMC laws. 
 
SB 547 makes changes to the types of entities that are subject to oversight by the state Bureau of Real Estate Appraisers. Currently, an entity with as few as 11 employee or independent contractor appraisers is defined as an AMC. Starting Jan. 1, an entity is defined as an AMC only if it maintains an appraiser panel of more than 15 independent contractor appraisers in California. 
 
The new law also clarifies that the state’s AMC registration and oversight law does not apply to entities engaged in the management of commercial appraisal assignments. 
 
View the relevant provisions of SB 547, starting on page 49. 
 
 
The Circuit Court of Cook County Illinois on July 7 dismissed a disciplinary action brought by the Illinois Department of Financial and Professional Regulation against a licensed appraiser engaged in an ad valorem tax appeal in 2012. 
 
The Illinois appraiser licensing law in effect in 2012 was limited in its applicability to federally related transactions, so the court found that the IDFPR did not have jurisdiction over the appraiser when performing an appraisal for a “state transaction.”
 
The outcome in this case is significant because it may be the first time that a trial court has thrown out a disciplinary action against an appraiser engaged in non-federally related appraisal work when the appraiser had voluntarily obtained a state-issued appraiser credential even though one was not required for the type of work being performed. In most voluntary licensing states, an appraiser who obtains a state-issued appraiser credential becomes subject to the requirements of the state appraiser licensing law and to the jurisdiction of the state appraiser licensing agency when performing all types of appraisals, not just federally related transactions. 
 
The case is Mark Pomykacz vs. Illinois Department of Financial and Professional Regulation. 
 
 
The Illinois State Bar Association on July 11 filed a complaint in the Circuit Court of Cook County to enjoin the Illinois Department of Financial and Professional Regulation from prosecuting lawyers licensed in Illinois for providing information about property values for tax appeals. 
 
In April, the IDFPR initiated administrative prosecutions of two Illinois licensed lawyers, alleging that each had engaged in the unlicensed practice of real estate appraisal. The sanctioned lawyers had filed briefs with the Property Tax Appeals Board and the DuPage County Board of Review, respectively, that contained an analysis of comparable sales and an opinion of value for the subject properties. 
 
In its complaint, the ISBA argued, “The activities of the lawyers in question, which are typical of activities routinely conducted by property tax lawyers, do not constitute the actions of an appraiser or the development of appraisal, and do not violate the Appraisal Act.” The ISBA further argued, “All the lawyers did was advocate on behalf of their clients by presenting legal argument in briefs on the basis of relevant information, much of it publicly available, urging a government body to reduce the assessed value of the clients’ properties.” The ISBA also noted that the IDFPR “lacks the authority to prosecute, discipline, or sanction lawyers for engaging…in conduct…that constitutes the practice of law.”
 
“The actions of an Illinois licensed attorney on behalf of a client in connection with real estate assessment proceedings do entail the practice of law,” ISBA stated, noting, “The Illinois Supreme Court has the inherent and exclusive authority to regulate the practice of law in Illinois.”
 
In the Motion to Dismiss, the IDFPR responded, “The Plain language of the [Appraiser] Act forbids any licensed person, even an attorney, who does not fall under a statutory exemption from engaging in the conduct that led to the pending administrative proceedings.” The IDFPR further argued, “The ISBA is trying to transform the Supreme Court’s oversight of lawyers as lawyers into a rule that only the Supreme Court can regulate anything an attorney does that is somehow connected to legal advocacy, period.” The IDFPR concluded, “The ISBA’s view is that so long as an attorney is undertaking some task as part of his or her legal advocacy, then only the Supreme Court may regulate that task.”
 
 
The Appraisal institute on Sept. 8 provided comments to the Louisiana Real Estate Commission regarding proposed rules for payment of reasonable and customary fees by appraisal management companies operating in the state. 
 
The letter stated, “AI supports the enhanced appraiser independence requirements found in the Dodd-Frank Act, including the requirements for the payment of customary and reasonable fees to appraisers and AMC registration.” AI also noted that language in the proposed rule appears consistent with language in the enabling statute originally enacted in 2012 and amended in 2016. AI concluded its letter by commenting, “It appears that the proposed rule attempts to ensure that the federal minimum requirements for registration and oversight of AMC’s are fulfilled by requiring AMC’s operating in Louisiana to pay customary and reasonable compensation to appraisers.”
 
A public hearing was held on the proposed rules on Sept. 27 by the Louisiana Real Estate Appraiser Board. 
 
Pursuant to Executive Order 17-16 issued by Gov. John Bel Edwards, the entire rulemaking docket will be submitted to the state’s Commissioner of Administration for approval, rejection or modification within 30 days. The purpose of this new process will “ensure that such proposed regulation serves Louisiana’s public policy of protecting the integrity of residential mortgage appraisals by requiring that the fees paid by AMCs for an appraisal are to be customary and reasonable.”
 
 
Zillow on Aug. 23 won dismissal of a federal lawsuit that challenged the accuracy of its “Zestimate” home valuation tool, Reuters reported. The lawsuit alleged that Zestimates constituted illegal appraisals and undervalued properties making them harder to sell. The court ruled that Zestimates were simply a starting point.
 
 
Hawaii Gov. David Ige on July 10 signed HB 50, legislation that enacts a comprehensive registration and oversight law for appraisal management companies. The law takes effect Jan. 1.
 
HB 50 mostly is consistent with the minimum requirements for appraisal management companies as adopted by the federal bank regulatory agencies. 
 
The Appraisal Institute’s Hawaii Chapter supported the adoption of this measure and provided written comments and oral testimony throughout its consideration. 

STANDARDS SETTING                                                              

The Appraisal Institute on July 28 submitted a letter of support to the Mortgage Industry Standards Maintenance Organization regarding its updated data standard for the exchange of rent roll information on commercial property. 
 
The proposed standard is designed to provide a consistent set of data points and definitions for use in financing and managing commercial property assets. MISMO approved the final standard in August and has embarked on new projects relating to real estate valuation. The projects include standardizing appraiser data requests and commercial comparable sales data. 
 
The Appraisal Institute, as a MISMO sponsor, is participating in work groups exploring these projects.

MEETINGS OF NOTE                                                                  

Valuation experts discussed valuing the fee simple interest in real estate sold as leased at the Appraisal Institute’s Property Rights Symposium Sept. 6-7 in Chicago. This issue is critical for eminent domain and property taxation scenarios, which seek the value of fee simple, and for mortgage lending, among others.
 
Nearly 50 participants, all experienced in valuation theory and practice, were invited by the AI Body of Knowledge Committee to participate in the symposium based on their prior work and achievements. The event was moderated by professional facilitator and strategic planner Dr. Duke Kuehn.
 
Participants explored value definitions and the methodology currently utilized by appraisers and those who use appraisal services, and engaged in a consensus building exercise to identify problems and propose solutions. A white paper summarizing the proceedings and outlining potential definition changes is expected to be exposed for comment early next year.
 
In related news, the International Association of Assessing Officials published a document in September entitled “Commercial Big-Box Retail: A Guide to Market-Based Valuation,” which intends to describe the process that will help appraisers support market value estimates for big-box retail properties. The Appraisal Institute heard from several Designated Members who expressed concern with the document because of inconsistencies with appraisal practice and standards. AI currently is reviewing the document.
 
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