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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2018

Appraisers Are at a Crossroads

There is a growing need for a better regulatory system for the appraisal industry

Home sales have steadily increased in the country in the last several years, which means there also has been an increase in the need for appraisals. All signs point to this trend continuing.

To keep up with this demand, everything should be done to make it as seamless as possible for appraisers to provide opinions of value that meet the needs of lenders and borrowers alike. Unfortunately, the regulatory system in place for the nation’s valuation profession is full of outdated, inefficient and duplicative rules and requirements that run completely counter to that goal.

The current regulatory system forces appraisers to overcome multiple, complex layers of regulation by making use of a redundant federal oversight agency to audit state licensing agencies, which in turn set up their own specific licensing requirements for appraisers.

Ideally, federal oversight would come in the form of some type of nationwide multistate licensing system (NMLS), similar to the NMLS structure used now for mortgage originators. 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 appraisers who safeguard home purchases for borrowers and reduce risk for lenders are being overburdened by current regulations that ultimately hurt their ability to serve their clients. The situation calls for appraisal-regulatory modernization.

Red tape

Indicative of the challenges facing the appraisal industry, a 2017 study conducted by the National Association of Realtors found that excessive regulation is one of the most common reasons for appraisers wanting to leave the profession — among appraisers who say they are likely to leave the industry within five years. Standards and associated required coursework for the profession change every two years, for example, causing appraisers to devote additional fees and significant time for minute, inconsequential updates.

Because most appraisers operate as small businesses, these regulatory requirements become a significant burden. To put it simply, appraisers are inundated with unnecessary, tedious requirements that change often and may not be recognized outside of the state where they practice.

This aging regulatory structure, which has been in place for nearly 30 years, has layers of federal rules and regulations that are duplicative and unnecessary while adding time and costs without additional lender and borrower benefit. This structure is unlike any in the federal system and has no comparable model — not for land surveyors, insurance agents, real estate brokers or mortgage originators.

In fact, the two most prominent parties that meet with homebuyers — real estate agents and mortgage originators — do not have direct federal oversight of their licensing functions. Instead, what mortgage originators do have is an efficient multi-state licensing program that can serve as a model for appraisal-regulatory modernization.

Good model

The real estate valuation profession should be able to adopt a structure based on this NMLS now in place for mortgage originators. Such a system 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 by developing and integrating a multistate licensing system like the NMLS was recently highlighted by the U.S. Department of Treasury in a report on technology and harmonizing state licensing laws in the financial services industry.

While all stakeholders don’t necessarily recommend the same solutions, they do see the same problems.

The report recognizes the benefits of the NMLS structure 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. This approach also would help to reduce inconsistencies across state laws and regulations.

Patchwork process

Creating an NMLS-like structure for the appraisal industry would provide better coordination among regulators and allow for simpler 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, in each state operates with different systems and requirements.

Many states now require background checks for appraisers, for example, without a central-processing or management system. While the mortgage originators’ NMLS features 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.

Recognizing the growing need to address the regulatory obligations and challenges of the current system and its inefficiencies, one proposed solution has been to waive the appraisal process altogether. This does not address the inherent structural problems, however, and creates more risk for lenders and end-consumers by not having fair market valuations in cases of default.

Appraisal waivers

Recently, North Dakota became the first state to ask for waivers for required independent appraisals in federally related transactions. Citing several factors, including a 12 percent increase in the state’s population, North Dakota Gov. Doug Burgum and Lisa Kruse, commissioner of the Department of Financial Institutions, requested the temporary waiver to allow banks to do their own property valuations.

While meant to meet the demand for appraisals in the state, this temporary waiver is certainly not in the interests of mortgage lenders or the homebuyers they serve, and it does not address the underlying issues of overregulation and inefficiencies that have led to the current situation. This is an example where being able to seamlessly operate across state lines would be the optimal solution.

Offering waivers, rather than increased appraiser access, is a short-sighted approach that exacerbates the negative impact on lenders and consumers by putting them at even greater risk by not having a quality appraisal performed by a designated professional. Solutions should focus instead on the long-term by recognizing the inefficiency of the current regulatory structure and emphasizing the need for an NMLS-like structure.

Streamlined structure

Instituting an NMLS-like regulatory structure would benefit appraisers, mortgage lenders and homebuyers 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 appraisers, many of which are small businesses.

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 to Congress 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. 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.

Time is of the essence, however, as more buyers and sellers enter the housing market. Mortgage originators deserve the highest-quality appraisals to protect their interests and the interest of homebuyers through a fair value analysis.

•  •  •

Lenders, originators and consumers should not have to face losing access to quality appraisals, which increases risk for all of them. Ultimately, quality appraisers and appraisals add value to the homebuying process for lenders and homebuyers, as well as the originators that serve both.

To reduce these challenges and provide benefits that reach well beyond the appraisal profession, it’s critical that Congress move toward adopting a structure like the NMLS for appraisers.


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