AI Comments on EGRPRA
October 30, 2024
The Honorable Jerome Powell
Chair
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
The Honorable Martin J. Gruenberg
Chair
Federal Deposit Insurance
Corporation
550 17th Street, SW
Washington, DC 20429‐9990
The Honorable Michael J. Hsu
Acting Comptroller of the Currency
Office of the Comptroller of the Currency
Constitution Center
400 Seventh Street, SW
Washington DC, 20219
Attention: Docket ID: OCC-2023-0016
Dear Chair Powell, Chair Gruenberg and Acting Comptroller Hsu:
On behalf of the more than 16,000 members of the largest organization of professional real estate
appraisers in the country, the Appraisal Institute thanks you for the opportunity to comment on the review of regulations mandated by the Economic Growth and Regulatory Paperwork Reduction Act (“EGRPRA”) by the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation’s (“the Agencies”). We applaud your agencies for soliciting comments on unduly burdensome and outdated regulations, as well as your pledge to hold outreach sessions across the country. We offer the following comments for your consideration.
Appraisal Threshold and USPAP Standards
The Agencies raised the transaction value threshold for requiring an appraisal from $250,000 to $400,000 upon the completion of the last EGRPRA review in 2019. The threshold increase is now law; however, the Appraisal Institute sees no justification to raise the threshold level once again. As it stands now, many real estate-related financial transactions fall below the $400,000 transaction value threshold and require no appraisal at all. This sacrifices the safety and soundness of lending institutions and exposes the public to unregulated valuation products.
Evaluations
During the previous EGRPRA review, the recurring theme from community banks and other institutions was the need for regulatory relief, with their sights set firmly on appraisals. When the dust cleared, the transaction value threshold for requiring an appraisal was raised from $250,000 to $400,000 for residential appraisals. Though appraisals are not required for loans of $400,000 or less, federal regulations allow lenders to utilize an “evaluation” to fully understand the collateral risk involved with the loan. This results in a significant portion of the real estate valuation work throughout the country being done by automated valuation models (“AVMs”), broker price opinions (“BPOs”), or through “competitive market analysis” (“CMA”) reports. In many cases, evaluations are conducted by in-house staff at institutions that have a vested interest in the very real estate transactions being evaluated. This negates the benefit of having an independent third party involved in the real estate transaction, and the omission of a licensed or certified appraisal requirement for properties under $400,000 creates a troublesome gap in the enforcement of appraisal standards.
As you know, upon the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) in 1989, the Federal and state governments spent millions of dollars setting up and maintaining a system of accrediting, educating, and disciplining appraisers. However, simultaneous with a regulatory system designed to enhance the public trust in appraisals being put in place, a dual system was created that allows non-appraisers in the real estate space to perform evaluations. Evaluations have no official regulations or applicable standards, can be ordered on any property type, and have no disciplinary process for bad actors. On the other hand, appraisers are required to be state-licensed, comply with the Uniform Standards of Professional Appraisal Practice (USPAP), and are subject to the states’ disciplinary processes. USPAP provides flexibility that allows the lender to have input to the appraiser’s scope of work so that the lender’s needs are met and by offering two report types that respond to the lender’s needs. It seems the very definition of redundancy to allow for evaluations when an appraisal can fulfill the same need.
USPAP’s Advisory Opinion 13 indicates the following regarding evaluations:
In other words, states’ incorporation of USPAP into law has the effect of prohibiting a licensed or certified appraiser from performing an evaluation, except in the fifteen states that have specifically allowed appraisers to perform evaluations. It is our belief that there should be only one way to express an opinion of value: through a USPAP-compliant appraisal. It avoids confusion, protects consumers from unregulated valuation products, and most importantly, protects the safety and soundness of the financial system.
The Appraisal Institute strongly urges the OCC to reassess the allowances for financial institutions to utilize evaluations considering the stringent professional standards that are applied only to appraisers. One solution to allowing appraisers to compete with unregulated evaluators lies in the Scope of Work Rule in USPAP. This rule stipulates that appraisers are responsible for establishing the scope of work to be performed in rendering an opinion of the property's market value. Lenders can ensure the scope of work is appropriate for the assignment. Through this avenue, an appraiser can, and should, be able to provide evaluations where a written appraisal is not mandated by law.
Barring a reassessment of the evaluation structure, another way to level the playing field for professional real estate appraisers would be by granting an exemption from USPAP when an appraiser is providing an evaluation service. Essentially, when a lender is required by a federal regulatory agency to determine the value of real property for a real estate-related financial transaction, and the regulated institution is not required by federal law to obtain an appraisal, the value of the real property may be provided by an appraiser who would not be subject to compliance with USPAP. This creates flexibility for lenders to turn to appraisers to provide cost competitive valuation services where the development and reporting requirements suit the needs of the assignment.
Exemptions from FIRREA
In response to the savings and loan crisis in the late 1980’s, Congress passed Title XI of FIRREA to ensure that property valuations used in mortgage lending were accurate and reliable, and to safeguard financial interests in the housing market, particularly for loans backed by government entities. However, the Agencies subsequently carved out exemptions from the appraisal requirements from FIRREA for several types of transactions, including real estate related loans that are eligible for sale to Government Sponsored
Enterprises (“GSEs”)1. As a result of this “GSE Exemption” and several other appraisal exemptions in federal law, approximately 90% of all residential real estate-related financial transactions engaged in by federally regulated institutions are exempt from the appraisal requirements; something that is unknown to many. While the GSEs have their own Selling Guide requirements for sellers to obtain appraisals, there is nothing in federal law that requires the GSEs to obtain appraisals. It is difficult to imagine that Congress passed FIRREA with the intent that approximately 90% of transactions would be exempt from their requirements.
Further, under Fannie Mae’s “Value Acceptance” and Freddie Mac’s Automated Collateral Evaluation (ACE) programs that grant lenders the option to waive the appraisal requirements, an appraisal is not being conducted for approximately 14%2 of mortgage loans that are sold to the GSEs. By allowing the GSEs to operate outside the appraisal requirements established under FIRREA, the Agencies risk undermining the very principles designed to protect consumers and stabilize the housing market. As we saw during the pandemic, the GSEs can ratchet up the number of appraisal waivers that are granted to around 50%. These relaxed underwriting requirements have led to a significant amount of risk being injected into the financial system.
The Appraisal Institute asks the federal banking agencies to reexamine whether the Value Acceptance and ACE programs align with the intent of Congress when it passed FIRREA, especially in light of the Supreme Court’s recent decision to end the “Chevron Deference.” While FIRREA allows the bank regulatory agencies to establish a dollar threshold below which appraisals are not required, no similar language exists in FIRREA that would allow the exemption of other broad categories of loans from FIRREA’s appraisal requirements. Had the Chevron Deference not been in place when the bank regulators were writing the FIRREA-related rules, it is very possible that the broad categories of exemptions would have been disallowed had they been challenged. But the application of the Chevron Deference granted significant leeway to write broad regulations because of the assumption that they were statutorily authorized unless challenged and proven to not be within the construction of a specific statute.
Professional Association Membership/Designations
The Appraisal Institute continues to stress that lenders should base their selection of appraisers on competency and qualifications, rather than other factors such as pricing and turnaround time. Unfortunately, lenders’ emphasis on fee and turnaround time continues to be the case in the current market, dominated as it is by appraisal management companies. Competency in appraisal services directly influences the integrity of real estate transactions. A well-educated and experienced appraiser brings a wealth of knowledge and expertise to the transaction process, ensuring that valuations are not only accurate, but also reflective of current market conditions.
Appraisers who hold professional designations, such as those conferred by the Appraisal Institute or other credentialing organizations, have demonstrated a commitment to maintaining high standards of practice. These designations are not merely credentials; they signify an appraiser’s adherence to rigorous training, ethical guidelines, and ongoing professional development. Engaging appraisers with such qualifications assures clients they will benefit from a thorough and objective appraisal process, which is essential in mitigating risks associated with real estate transactions.
The Dodd-Frank Act contained language promoting greater professionalism and advanced training within the appraisal industry, and codified language found in the GSE selling guides that allows for the consideration of an appraiser’s relevant education, sample appraisals, references, experience, and membership in a nationally recognized professional appraisal organization when awarding appraisal
assignments. More than a decade after the passage of the Dodd-Frank Act, the appraisal profession has not seen any meaningful changes in how appraisals are ordered. We strongly urge the Agencies to address this issue by emphasizing to financial institutions the need to focus on obtaining a high-quality appraisal and to prioritize the use of appraisers who possess professional designations that go beyond the minimum licensing standards.
Thank you again for the opportunity to comment on the Agencies’ review of EGRPRA. We hope that these suggestions and comments are found to be constructive and beneficial. Please contact Scott DiBiasio Director of Government Affairs for the Appraisal Institute, at 202-292-5593 or sdibiasio@appraisalinstitute.org, or Brian Rodgers, Senior Manager of Government Relations, at (202) 298-5597 or brodgers@appraisalinstitute.org should you have any questions.
Sincerely,
Sandra K. Adomatis, SRA
2024 President
The Honorable Jerome Powell
Chair
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
The Honorable Martin J. Gruenberg
Chair
Federal Deposit Insurance
Corporation
550 17th Street, SW
Washington, DC 20429‐9990
The Honorable Michael J. Hsu
Acting Comptroller of the Currency
Office of the Comptroller of the Currency
Constitution Center
400 Seventh Street, SW
Washington DC, 20219
Attention: Docket ID: OCC-2023-0016
Dear Chair Powell, Chair Gruenberg and Acting Comptroller Hsu:
On behalf of the more than 16,000 members of the largest organization of professional real estate
appraisers in the country, the Appraisal Institute thanks you for the opportunity to comment on the review of regulations mandated by the Economic Growth and Regulatory Paperwork Reduction Act (“EGRPRA”) by the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation’s (“the Agencies”). We applaud your agencies for soliciting comments on unduly burdensome and outdated regulations, as well as your pledge to hold outreach sessions across the country. We offer the following comments for your consideration.
Appraisal Threshold and USPAP Standards
The Agencies raised the transaction value threshold for requiring an appraisal from $250,000 to $400,000 upon the completion of the last EGRPRA review in 2019. The threshold increase is now law; however, the Appraisal Institute sees no justification to raise the threshold level once again. As it stands now, many real estate-related financial transactions fall below the $400,000 transaction value threshold and require no appraisal at all. This sacrifices the safety and soundness of lending institutions and exposes the public to unregulated valuation products.
Evaluations
During the previous EGRPRA review, the recurring theme from community banks and other institutions was the need for regulatory relief, with their sights set firmly on appraisals. When the dust cleared, the transaction value threshold for requiring an appraisal was raised from $250,000 to $400,000 for residential appraisals. Though appraisals are not required for loans of $400,000 or less, federal regulations allow lenders to utilize an “evaluation” to fully understand the collateral risk involved with the loan. This results in a significant portion of the real estate valuation work throughout the country being done by automated valuation models (“AVMs”), broker price opinions (“BPOs”), or through “competitive market analysis” (“CMA”) reports. In many cases, evaluations are conducted by in-house staff at institutions that have a vested interest in the very real estate transactions being evaluated. This negates the benefit of having an independent third party involved in the real estate transaction, and the omission of a licensed or certified appraisal requirement for properties under $400,000 creates a troublesome gap in the enforcement of appraisal standards.
As you know, upon the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) in 1989, the Federal and state governments spent millions of dollars setting up and maintaining a system of accrediting, educating, and disciplining appraisers. However, simultaneous with a regulatory system designed to enhance the public trust in appraisals being put in place, a dual system was created that allows non-appraisers in the real estate space to perform evaluations. Evaluations have no official regulations or applicable standards, can be ordered on any property type, and have no disciplinary process for bad actors. On the other hand, appraisers are required to be state-licensed, comply with the Uniform Standards of Professional Appraisal Practice (USPAP), and are subject to the states’ disciplinary processes. USPAP provides flexibility that allows the lender to have input to the appraiser’s scope of work so that the lender’s needs are met and by offering two report types that respond to the lender’s needs. It seems the very definition of redundancy to allow for evaluations when an appraisal can fulfill the same need.
USPAP’s Advisory Opinion 13 indicates the following regarding evaluations:
An evaluation, when performed by an individual acting as an appraiser, is an appraisal. In addition to complying with USPAP, the appraiser must be aware of and comply with any additional assignment conditions and reporting requirements imposed on the assignment.
In other words, states’ incorporation of USPAP into law has the effect of prohibiting a licensed or certified appraiser from performing an evaluation, except in the fifteen states that have specifically allowed appraisers to perform evaluations. It is our belief that there should be only one way to express an opinion of value: through a USPAP-compliant appraisal. It avoids confusion, protects consumers from unregulated valuation products, and most importantly, protects the safety and soundness of the financial system.
The Appraisal Institute strongly urges the OCC to reassess the allowances for financial institutions to utilize evaluations considering the stringent professional standards that are applied only to appraisers. One solution to allowing appraisers to compete with unregulated evaluators lies in the Scope of Work Rule in USPAP. This rule stipulates that appraisers are responsible for establishing the scope of work to be performed in rendering an opinion of the property's market value. Lenders can ensure the scope of work is appropriate for the assignment. Through this avenue, an appraiser can, and should, be able to provide evaluations where a written appraisal is not mandated by law.
Barring a reassessment of the evaluation structure, another way to level the playing field for professional real estate appraisers would be by granting an exemption from USPAP when an appraiser is providing an evaluation service. Essentially, when a lender is required by a federal regulatory agency to determine the value of real property for a real estate-related financial transaction, and the regulated institution is not required by federal law to obtain an appraisal, the value of the real property may be provided by an appraiser who would not be subject to compliance with USPAP. This creates flexibility for lenders to turn to appraisers to provide cost competitive valuation services where the development and reporting requirements suit the needs of the assignment.
Exemptions from FIRREA
In response to the savings and loan crisis in the late 1980’s, Congress passed Title XI of FIRREA to ensure that property valuations used in mortgage lending were accurate and reliable, and to safeguard financial interests in the housing market, particularly for loans backed by government entities. However, the Agencies subsequently carved out exemptions from the appraisal requirements from FIRREA for several types of transactions, including real estate related loans that are eligible for sale to Government Sponsored
Enterprises (“GSEs”)1. As a result of this “GSE Exemption” and several other appraisal exemptions in federal law, approximately 90% of all residential real estate-related financial transactions engaged in by federally regulated institutions are exempt from the appraisal requirements; something that is unknown to many. While the GSEs have their own Selling Guide requirements for sellers to obtain appraisals, there is nothing in federal law that requires the GSEs to obtain appraisals. It is difficult to imagine that Congress passed FIRREA with the intent that approximately 90% of transactions would be exempt from their requirements.
Further, under Fannie Mae’s “Value Acceptance” and Freddie Mac’s Automated Collateral Evaluation (ACE) programs that grant lenders the option to waive the appraisal requirements, an appraisal is not being conducted for approximately 14%2 of mortgage loans that are sold to the GSEs. By allowing the GSEs to operate outside the appraisal requirements established under FIRREA, the Agencies risk undermining the very principles designed to protect consumers and stabilize the housing market. As we saw during the pandemic, the GSEs can ratchet up the number of appraisal waivers that are granted to around 50%. These relaxed underwriting requirements have led to a significant amount of risk being injected into the financial system.
The Appraisal Institute asks the federal banking agencies to reexamine whether the Value Acceptance and ACE programs align with the intent of Congress when it passed FIRREA, especially in light of the Supreme Court’s recent decision to end the “Chevron Deference.” While FIRREA allows the bank regulatory agencies to establish a dollar threshold below which appraisals are not required, no similar language exists in FIRREA that would allow the exemption of other broad categories of loans from FIRREA’s appraisal requirements. Had the Chevron Deference not been in place when the bank regulators were writing the FIRREA-related rules, it is very possible that the broad categories of exemptions would have been disallowed had they been challenged. But the application of the Chevron Deference granted significant leeway to write broad regulations because of the assumption that they were statutorily authorized unless challenged and proven to not be within the construction of a specific statute.
Professional Association Membership/Designations
The Appraisal Institute continues to stress that lenders should base their selection of appraisers on competency and qualifications, rather than other factors such as pricing and turnaround time. Unfortunately, lenders’ emphasis on fee and turnaround time continues to be the case in the current market, dominated as it is by appraisal management companies. Competency in appraisal services directly influences the integrity of real estate transactions. A well-educated and experienced appraiser brings a wealth of knowledge and expertise to the transaction process, ensuring that valuations are not only accurate, but also reflective of current market conditions.
Appraisers who hold professional designations, such as those conferred by the Appraisal Institute or other credentialing organizations, have demonstrated a commitment to maintaining high standards of practice. These designations are not merely credentials; they signify an appraiser’s adherence to rigorous training, ethical guidelines, and ongoing professional development. Engaging appraisers with such qualifications assures clients they will benefit from a thorough and objective appraisal process, which is essential in mitigating risks associated with real estate transactions.
The Dodd-Frank Act contained language promoting greater professionalism and advanced training within the appraisal industry, and codified language found in the GSE selling guides that allows for the consideration of an appraiser’s relevant education, sample appraisals, references, experience, and membership in a nationally recognized professional appraisal organization when awarding appraisal
assignments. More than a decade after the passage of the Dodd-Frank Act, the appraisal profession has not seen any meaningful changes in how appraisals are ordered. We strongly urge the Agencies to address this issue by emphasizing to financial institutions the need to focus on obtaining a high-quality appraisal and to prioritize the use of appraisers who possess professional designations that go beyond the minimum licensing standards.
Thank you again for the opportunity to comment on the Agencies’ review of EGRPRA. We hope that these suggestions and comments are found to be constructive and beneficial. Please contact Scott DiBiasio Director of Government Affairs for the Appraisal Institute, at 202-292-5593 or sdibiasio@appraisalinstitute.org, or Brian Rodgers, Senior Manager of Government Relations, at (202) 298-5597 or brodgers@appraisalinstitute.org should you have any questions.
Sincerely,
Sandra K. Adomatis, SRA
2024 President