Editor’s Note: This feature originally appeared in the November issue of MReport.
A stack of growing and outdated rules and regulations weighs down real estate appraisers in the United States.
An antiquated regulatory structure and layers of federal rules and regulations add costs and a false sense of added protection that is duplicative and unnecessary. This aging regulatory structure, in place for nearly 30 years, is unlike any other in the federal system. There is no comparable system of federal regulation or oversight found within other real estate or finance industries. The two most prominent parties that engage with homebuyers—real estate agents and mortgage originators—do not have federal oversight of their licensing functions. Many aspects of federal oversight of the valuation profession’s regulatory structure have remained static and out of touch while redundant red tape has been added. In stark contrast, finance mortgage methods have changed, and alternative valuation methods are more advanced than ever.
Consider some examples of how the world has changed since Congress, in the wake of the savings-and-loan crisis, enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which regulates the U.S. appraisal profession, in 1989:
- The Dow Jones Industrial Average closed the year at 2,753 (vs. 2017’s year-end closing of 24,719);
- U.S. postage stamps cost 25 cents (vs. 50 cents in October 2018);
- A new house’s average cost was $120,000 (vs. $305,372 in 2017); and
- A gallon of gas cost 97 cents (vs. $2.84 in October 2018).
Technological changes since then abound. In 1989, Microsoft first released Office, the first satellite of the Global Positioning System was placed into orbit, and Nintendo began selling the Game Boy. (Also, the Berlin Wall fell, Chinese protesters gathered in Tiananmen Square, and the Exxon Valdez gushed oil in Alaska.)
Nearly three decades later, U.S. appraisers continue to labor under rules and regulations virtually unchanged since that long-ago era. Today appraisers are inundated with unnecessary standards and training requirements. The federal government is unnecessarily playing “big brother” over the states when state regulatory agencies could function just fine on their own with a federal backstop authority to ensure states continue to meet minimum requirements. This places states in the very unusual position of being audited by a federal agency, which is unique in federal statute. Outdated and burdensome regulations have created a layering effect of rules and regulations, including:
- Background checks without a federal mandate;
- Unappealing supervisor appraiser and trainee-appraiser requirements;
- Imposing license renewal fees;
- Extensive course requirements; and
- Expensive mandates to purchase rules and regulations.
The structure impedes innovation and can place appraisers at a disadvantage with competitors in other professions, such as accountants and attorneys. The bureaucracy created has imposed unnecessary costs throughout the system. In what other profession are practitioners forced to pay for the regulations that oversee their work? Additionally, appraisers are given little flexibility as to how they best can perform appraisals in service of their clients.
Why Does it Matter?
A home purchase is one of the most important lifetime investments anyone can undertake. For most Americans, it’s the single biggest purchase they will ever make. Appraisals serve an essential role in that purchase: they safeguard the fairness of home buying and selling for everyone. Appraisals conducted by highly trained and skilled professionals with knowledge of the local area are the very best protection for consumers and lenders. Without independent and qualified appraisals, home-secured lending poses significant risks to consumers, investors, and the entire economy. Real estate appraisers are critical guardians of consumer interests. They are uniquely qualified to protect consumer financial interests by providing an objective, reliable opinion of property value. Appraisers are independent third parties who perform a service for a fee rather than for a commission contingent on the determined value, the approval of a loan. or the eventual sale of the property.
The Impact on Appraisers
All this over-regulation results in negative effects on appraisers. Suffocating regulation is causing more and more appraisers–the majority of whom are small business owners—to reconsider staying in the field and discouraging others from joining. Predictive analytics for the next five to 10 years suggest there will be even fewer appraisers due to factors such as retirements, fewer new people entering the profession, economic factors, and government regulation. This affects not just residential and commercial real estate appraisers engaged in mortgage work, but also those practicing in areas such as development consulting, litigation, tax and financial reporting services, and other valuation services. Appraisers are being choked by rules and regulations in nearly
every facet of their business. From how an appraiser reports an appraisal, to supervising trainees, to uneven licensing requirements, to licensing and registration fees passed down by clients, to mandates from federal agencies, appraisers’ professional lives have become extremely complicated, more expensive, and less productive due to a dated and archaic regulatory structure. As a result, consumers—and real estate professionals who work with appraisers—suffer from increased turnaround time, delays in loans, and potentially higher costs.
Indicative of the challenges, a March 2017 “Appraiser Trends Study” conducted by the National Association of Realtors found that excessive regulation is one of the most common reasons for leaving the profession among appraisers who are unlikely to remain for another five years. For example, standards and associated required coursework for the profession change every two years, causing appraisers to devote additional fees and significant time for a minute, inconsequential updates. Since most appraisers operate as small businesses, these requirements become a significant burden.
Regulatory Modernization Priorities
The situation calls for appraisal regulatory modernization. There are three primary areas where regulatory modernization is needed:
Appraisal oversight: Appraisal regulation should be aligned along the lines of regulatory structures in other industries, such as insurance and mortgage origination, recently enacted by Congress. Those structures maintain state licensing authorities but set up more efficient licensing application and renewal processes. Any solution also should explore a nationwide platform, or portal, for appraisal practitioners, users of appraisal services, and state regulators to use to process license applications and renewals, thus eliminating redundancies and red tape. Enforcement: Streamlined regulation should provide clear audit processes for states’ appraiser regulatory agencies, allowing state regulators to focus on licensing administration and enforcement. Also, modernized regulations should improve information sharing among state regulatory agencies through a common platform.
Appraisal quality: Financial institutions should be authorized and encouraged to “raise the bar” when hiring real estate appraisers, utilizing professional appraisal designations that exceed minimum licensing requirements when procuring appraisal services. The current regulatory system forces appraisers to overcome multiple, complex layers of regulation by creating a redundant federal oversight agency to audit state licensing agencies, who in turn set their own specific licensing requirements.
A Proposed Solution
Ideally, federal oversight would come in the form similar to the Nationwide Multistate Licensing System (NMLS). But under the current system, there is no national platform for states to coordinate licensing, which makes it extremely inefficient for appraisers to work across state lines. The real estate valuation profession should be able to adopt a structure based on the NMLS, which would maximize efficiency through improved coordination among state regulators, lower cost burdens, and expand lender and consumer benefits. Lessening burdensome regulations also can potentially counteract the negative sentiment about over-regulation of the profession among appraisers.
In fact, updating the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) by developing and integrating a multistate licensing systems like the NMLS was recently highlighted by the U.S. Department of Treasury in a July 2018 report on technology and harmonizing state licensing laws in the financial services industry (titled “A Financial System that Creates Economic Opportunities— Nonbank Financials, Fintech, and Innovation”).
This report recognizes the benefits of the NMLS for other professions, which has been “to reduce duplicative regulatory requirements, promote greater information sharing and coordination, and maintain consumer protections and the strength and resilience of regulated firms.” The report recommends efforts to build a more unified licensing structure and supervisory system across the states, which would also reduce inconsistencies across state laws and regulations. An NMLS-like structure would provide better coordination among regulators and allow for a more straightforward flow of information by providing a single stop to access data. Regulators could use one uniform database for appraisers across states. In contrast, in the current regulatory structure, each state operates with different systems and requirements. For example, many states now require background checks for appraisers without a central processing or management system. While the NMLS has one-stop shopping for background checks, appraisers—who often work in more than one state—are forced to navigate a patchwork process that increases costs for lenders, consumers, and appraisers.
Instituting an NMLS-like regulatory structure would benefit appraisers, mortgage lenders, and consumers by making the appraisal process more efficient and allowing more appraisers to work and share information across states. In turn, this would increase access to qualified, licensed appraisers and decrease costs for the small business appraiser. A streamlined structure could prevent some of the looming problems that lenders and consumers may have to face if housing demand continues to rise but the regulatory system and its burdensome, duplicative requirements are not addressed. Appraisers are not the only profession calling for appraisal modernization. Real estate brokers, mortgage lenders, homebuilders, and others have expressed toCongress the need for a change to the federal regulatory structure. Specifically, these groups have asked Congress to examine the current appraisal regulatory framework, appraisal information systems, the impact of recent regulatory reforms on the valuation profession, and the availability of qualified appraisers, particularly in rural areas.
While all stakeholders don’t necessarily recommend the same solutions, they do see the same problems. And they acknowledge that Congress is well placed to address the need for appraisal modernization head-on to reduce the burden on the real estate and finance industries. To reduce these challenges and provide benefits that reach well beyond the appraisal profession and to mortgage originators and the homebuyers they serve, it’s critical that Congress move to adopt a structure like the NMLS for the appraisal profession.
Ultimately, consideration must be given to the impact on consumers, who are making the most important purchase of their lives, and whether proposed changes improve safeguards or increase risks.