Appraiser Independence —Observations on the CFPB’s Interim Final Rule (And What the Heck Do They Do With Those Appraiser Regulatory Fees Anyway?)

Appraiser Independence —Observations on the CFPB’s Interim Final Rule (And What the Heck Do They Do With Those Appraiser Regulatory Fees Anyway?)

By Dennis Scardilli, Esq., MAI, SCGREA1 

On December 22, 2011, the federal Consumer Financial Protection Bureau (the "Bureau" or "CFPB") issued a "Restatement of Federal Consumer Financial Law Regulations" under the Truth in Lending Act (TILA). Rulemaking authority for TILA had previously been under the Board of Governors of the Federal Reserve System (the "Board") but was transferred to the Bureau as of July 21, 2011 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 76 Fed. Reg. 79768 (December 22, 2011) (To be Codified at 12 CFR 1026).

The comments below, which I plan to submit to the Bureau prior to the February 21 deadline for comments, focus on the section of Regulation Z that addresses "Appraiser Independence." The CFPB has promulgated these rules for new section 129E of TILA added by Section 1472(a), Subtitle F, of the Mortgage and Anti-Predatory Lending Act of 2010 ("MRAPLA"). Appraiser Independence was essentially codification of the Housing Valuation Code of Conduct (HVCC), which was established after then New York State Atty. Gen. Andrew Cuomo's investigation into lenders allegedly pressuring appraisers into creating predetermined valuations.

The Board had originally published a Final Interim Rule for Appraiser Independence on October 18, 2010, fully effective April 1, 2011. The Bureau's restatement adopts the Board's actual rule verbatim but leaves out staff commentary and explanation.

In general, I believe that Bureau/Board Interim Final Rule is a reasonable "first cut" at creating national regulations on Appraiser Independence. Both agencies are to be commended for their respective efforts.

By eliminating the Board's explanatory comments that preceded the actual rule, the Bureau's version is a cleaner read. However, the lack of official clarification will ultimately create different holdings in a variety of adjudications. This is particularly problematic because state governments are the primary enforcement mechanism for Appraiser Independence, under TILA. And, enforcement is through state real estate appraiser entities and attorneys general.

State appraiser regulatory entities are the key to the success of the Interim Final Rule because they will be the gatekeepers to the appraisal regulatory system. As a result, they are the key to the entire "federalism regime" for appraiser regulation in the U.S. For more on "why" this is the case, see my soon-to-be-published chapter on Real Property Valuation Law in Real Estate Finance - Beyond Traditional Valuation in the treatise entitled Real Estate Financing (LexisNexis Matthew Bender 2012).

Under MRAPLA, Appraiser Independence will be enforced by financially strapped state regulatory agencies, along with overworked state attorneys, general lawyers, and staff.

Outside of class actions, or operating in a state where the attorney general is running for governor, it is unlikely that the current appraiser regulatory regime will be able to make good use of the hard work put into these rules.

The recent GAO study mandated by Dodd-Frank shed light on the effectiveness of the "federalism" structure of appraisal regulation in the United States. GAO 12-147, Real Estate Appraisals, Appraisal Subcommittee Needs to Improve Monitoring Procedures (January 2012). Unfortunately, that study sheds an unduly critical light on the work of the Appraisal Subcommittee and its dedicated and hard-working career staff. The GAO study could be seen by some as implying that dedicated state appraiser board members and their equally dedicated career staff need more oversight by the ASC to perform their jobs. That is far from reality. Those dedicated federal and state board members and their staffs only need more money to perform the responsibilities given to them under federal and state law.

There are two major issues in regard to that money, which the GAO did not address in their 2011 report for reasons that will become evident as you read my comments below. The Bureau will need to be aware of these issues because they bear directly on the enforcement of the Appraiser Independence Interim Final Rule.

These issues cut to the chase on why the U.S. appraiser regulatory system is seen by some as a pending failure.

In most of the fifty-five U.S. jurisdictions, the majority of real estate appraisal and regulatory fees are siphoned off into their state or territory's general treasury. The GAO made this issue a finding in its 2003 report on the ASC's role in appraiser regulation. GAO, Opportunities to Enhance Oversight of the Real Estate Appraisal Industry, May 2003, p. 5.

Since then, cash-strapped state governments have continued to siphon off those fees. As a result, the "federalism regime" of real estate appraisal regulation has been squeezed to the point where it cannot take on any more federal mandates without concomitant financial support.

Where does financial support come when governmental budgets are strapped? It's already there.

Most state regulatory entities do not have sufficient funding, staff, or other resources to enforce the basic regulatory provisions of FIRREA. The problem is not lack of money. The problem is that the states are siphoning off appraiser registration and regulatory funding fees. Appraiser regulatory fees are put into state general funds for other expenditures instead of enforcement of the federal mandate to regulate real estate appraisers and appraisal activities.

The second issue is that, other than the Bureau, governmental entities involved in appraiser regulation at the federal level either have no interest in, and/or insufficient political "juice" to enforce, Appraiser Independence. Well-meaning as the ASC and the FFIEC are, the political reality is that they are buried too deep in the "bowels of the (federal) bureaucracy" to stand up to state governments siphoning off funding from a federal mandate.

I have served both in career and appointed positions at four levels of government, including union chief steward at a federal agency regional office and now perform pro bono work for the American Guild of Appraisers. Career staff should not be put in the position of having to face off against elected state governors and legislators.

The only way to address the issue of inadequate funding for appraiser regulation is to combine the Bureau's high profile with the political will of a bi-partisan coalition of federal elected representatives in Congress, then move the regulatory function under the wings of a high-level political appointee in the executive branch of the federal government. In my opinion, either CFPB's Richard Cordrey or HUD Secretary Shaun Donovan have the hutzpah to turn this problem into a solution.

As with many regulatory initiatives, the Bureau will need to determine whether the provisions in this Interim Final Rule are effective. You will not learn that in Washington. It will be necessary for the Bureau, as well as the other FFIEC agencies, to have conference calls, feedback sessions, interaction with the Hill, and also to solicit input from appraisers and users of appraisal services. Talk directly with state appraiser entity members and staff, Appraisal Subcommittee and The Appraisal Foundation staff, the chief appraisers of federal agencies, leaders of appraisal organizations, entrepreneurial and institutional Appraisal Management Company leadership and grunt-in-the-trenches appraisers.

The Bureau is already soliciting such input on a number of other issues. I respectfully request that you do the same regarding enforcement of Appraiser Independence and the entire appraisal regulatory regime. Then, you will see, and hear, the need to adequately fund state appraiser regulatory agencies.

Like many Americans of all political persuasions, I have a great deal of hope that the Bureau will bring fairness, transparency and a new way of thinking to address issues of concern to the consumers and small businesses of this country. Thank you.

Respectfully submitted,

1 Admitted to practice law only in New Jersey and Pennsylvania; Member of the Appraisal Institute (MAI), non-practicing New Jersey Stare Certified General Real Estate Appraiser (SCGREA), Appraisal Qualifications Board Certified Uniform Standards of Professional Appraisal Practice (USPAP) Instructor. He represents appraisers before the New Jersey State Board of Real Estate Appraisers and provides pro bono legal support for the NJ Chapter of the American Guild of Appraisers.

Dennis Scardilli is the author of a special alert published in Real Estate Financing (LexisNexis Matthew Bender) entitled The Mortgage Reform and Anti-Predatory Lending Act (MRAPLA) of 2010 Creates the Most Significant Changes in Appraisal Law in More than Two Decades as well as a soon-to-be published complete chapter on appraisal in that same treatise entitled REAL PROPERTY VALUATION LAW FOR REAL ESTATE FINANCING-BEYOND TRADITIONAL APPRAISALS. 

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