Last week’s Congressional subcommittee hearing, “Appraisal Oversight: The Regulatory Impact on Consumers and Businesses,” took a few jabs at the practice–alleged to be a common practice of appraisal management companies (AMCs)–of offering appraisal assignments to appraisers that lack local knowledge or so-called “geographic competency.”
One expert witness went so far as to read a note from a Tallahassee, Florida-based appraiser who recently received an email from a national AMC asking the appraiser to bid on an assignment to complete a residential appraisal on a property located in Cairo, Georgia. While he admitted not knowing exactly where Cairo was, it turns out it's only some 30 miles away from Tallahassee. Do relevant regulations permit a bank or AMC to assign an appraisal on a Cairo, Georgia-based property to an appraiser whose office is physically located in Tallahassee, Florida?
I suggest three key regulatory issues to consider if you were tasked with ordering this appraisal and were contemplating engaging a Tallahassee appraiser.
1) Is the appraiser licensed or certified in the appropriate state?
The answer must be yes for several reasons. For starters, each state has an appraiser act–or similar legislation–that may prohibit a person without a license from valuing real property; although each state takes a different approach, and there are other issues beyond the scope of this article.
2) Does the appraiser satisfy the standard for competence contained in USPAP?
Again, the answer must be yes. Almost all states require appraisers to comply with USPAP–the Uniform Standard for Professional Appraisal Practice–when performing appraisals in connection with mortgage lending transactions. And, if you’re selling the loan to Fannie Mae, the selling guide requires compliance with state appraisal laws. Moreover, where bank regulatory requirements apply, one of the foundational minimum requirements is that the appraisal be prepared in accordance with USPAP. Dodd-Frank underscored that requirement by adding a provision to FIRREA Title XI requiring the bank regulators to mandate that regulated banks conduct a separate, independent review of each appraisal to ensure it complies with USPAP.
3) Does the appraiser satisfy the competency standards in any relevant regulatory requirements?
What does USPAP have to say about so-called geographic competency? There is no requirement that the appraiser be located a certain distance from the property, or even in the same state. The competency rule does not address licensing and covers only issues such as whether the appraiser has appropriate knowledge and expertise. Notably, though, the Competency Rule provides two separate tracks. On the first track, the appraiser is required to be competent at the time the appraiser accepts the assignment. But, the competency rule would also permit the appraiser to acquire competency while completing the work—including by associating with local experts—so long as the appraiser discloses their lack of competency before submitting the assignment. It’s this second track that could be a stumbling block for unwary banks or other lenders.
Here’s the potential pitfall: the relevant banking regulations and Fannie Mae’s selling guide require the appraiser to have the necessary level of competence, including local market knowledge or so-called “geographic competence” where required, prior to the assignment. Neither permits appraisers to take, or the bank to permit an appraiser to take, the second track to competence.
So, could our hypothetical appraisal coordinator order an appraisal on a property in Cairo, Georgia from an appraiser physically located in Tallahassee, Florida, even in connection with a loan origination where the bank does not qualify for an appraisal exemption? The answer is “yes” so long as the appraiser is appropriately licensed or certified, and has the appropriate background and experience, which may include local market knowledge, to complete the assignment competently. And it’s not too hard to imagine a scenario where that’s the case, especially considering it’s only 30 miles from Tallahassee to Cairo and many appraisers, especially those physically located close to state lines, hold licenses in multiple states. Of course, it’s crucial that the appraiser has the relevant competency prior to accepting the assignment. Even though USPAP may provide a procedure for an appraiser without the necessary competence to accept the assignment and subsequently acquire the necessary competence, that approach doesn’t work under the agencies’ appraisal regulations or relevant Fannie Mae requirements.
