What is the primary function of the Appraisal Subcommittee (ASC) as defined by FIRREA?

Chapter Title:

Appraisal Regulations & Standards: USPAP, FIRREA, & Licensing

Introduction:

Introduction: Appraisal Regulations & Standards: USPAP, FIRREA, & Licensing

The reliability and objectivity of real estate appraisals are paramount to the stability and integrity of financial markets. This chapter focuses on the regulatory framework governing the appraisal profession, specifically examining the Uniform Standards of Professional Appraisal Practice (USPAP), the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), and state licensing requirements. A comprehensive understanding of these standards and regulations is crucial for appraisers to ensure credible and ethical practice, thereby safeguarding public trust and promoting sound financial decision-making.

The scientific importance of this topic lies in its direct impact on market efficiency and risk management. Accurate appraisals are essential for informed investment, lending, and regulatory oversight. Deviations from established standards can lead to systematic errors in property valuation, contributing to asset bubbles, financial instability, and economic downturns, as evidenced by the Savings and Loan crisis that spurred the creation of FIRREA. Therefore, adherence to and continuous improvement of appraisal regulations are critical for maintaining market equilibrium and mitigating systemic risk.

The educational goals of this chapter are threefold. First, to provide a detailed overview of USPAP, including its structure, ethical guidelines, and specific standards for appraisal development and reporting. Second, to analyze the key provisions of FIRREA and its impact on the appraisal industry, including the establishment of the Appraisal Subcommittee and the requirement for state licensing and certification. Third, to examine the variations in state licensing requirements and the role of the Appraisal Qualifications Board (AQB) in setting minimum qualification criteria. Upon completion of this chapter, participants will be equipped with the knowledge necessary to navigate the complex regulatory landscape of real estate appraisal and to perform their professional duties in a competent, ethical, and legally compliant manner.

Topic:

Appraisal Regulations & Standards: USPAP, FIRREA, & Licensing

Body:

Appraisal Regulations & Standards: USPAP, FIRREA, & Licensing

I. Introduction

This chapter delves into the intricate world of appraisal regulations and standards, focusing on the critical role of the Uniform Standards of Professional Appraisal Practice (USPAP), the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and the licensing requirements that govern the appraisal profession. Understanding these elements is crucial for ensuring ethical and competent appraisal practices, safeguarding the public trust, and maintaining stability within the real estate market. The chapter provides a scientific approach to the appraisal profession.

II. The Appraisal Profession: A Historical Context

Prior to the 1980s, the appraisal industry operated with minimal government oversight. Standards were largely dictated by professional associations and applied primarily to their own members. However, the Savings and Loan (S&L) crisis of the 1980s exposed significant flaws in appraisal practices, contributing to widespread financial instability. Inconsistent standards, inflated appraisals, and a lack of regulatory enforcement led to substantial losses for financial institutions and taxpayers. This crisis served as a catalyst for comprehensive reform, culminating in the establishment of industry-wide standards and regulatory frameworks.

III. The Appraisal Foundation: A Cornerstone of Professionalism

In response to the S&L crisis, nine professional appraisal associations united to create the Uniform Standards of Professional Appraisal Practice (USPAP). The involved associations were the American Institute of Real Estate Appraisers, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, the Appraisal Institute of Canada, the International Association of Assessing Officers, the International Right-of-Way Association, the National Association of Independent Fee Appraisers, the National Society of Real Estate Appraisers, and the Society of Real Estate Appraisers. The original USPAP drafted by the Ad Hoc Committee took effect in 1987.

Simultaneously, these associations (excluding the Appraisal Institute of Canada) formed The Appraisal Foundation, a non-profit organization based in Washington, D.C. The Appraisal Foundation is dedicated to fostering professionalism in the industry.

The Appraisal Foundation's purpose is to:

• Ensure that appraisers are qualified to offer their services.
• Promote the Uniform Standards of Professional Appraisal Practice (USPAP).

FIRREA, enacted in 1989, further solidified the importance of appraisal standards by incorporating USPAP into law and mandating state certification and licensing of appraisers based on recognized competence standards.

A. Key Boards Within The Appraisal Foundation

The Appraisal Foundation operates through several key boards:

1. Appraisal Standards Board (ASB): Responsible for developing, interpreting, and updating USPAP. The ASB ensures that USPAP remains relevant and responsive to evolving appraisal practices and market conditions.

2. Appraiser Qualifications Board (AQB): Sets minimum education, experience, and examination requirements for appraiser licensing and certification. The AQB plays a critical role in maintaining appraiser competency.

3. Appraisal Practices Board (APB): Develops guidance on recognized valuation methods and techniques, addressing the practical application of appraisal principles.

IV. Uniform Standards of Professional Appraisal Practice (USPAP)

USPAP is the ethical and performance standard for appraisers. It represents a consensus-based set of guidelines designed to promote public trust in appraisal services. USPAP is continuously updated to reflect changes in the appraisal profession.

A. Structure of USPAP

USPAP comprises the following components:

1. Preamble: Outlines the purpose and scope of USPAP.

2. Ethics Rule: Establishes fundamental ethical obligations for appraisers, encompassing conduct, management, confidentiality, and record keeping.

   • Conduct: Requires appraisers to act with integrity and avoid misleading or fraudulent behavior.
   • Management: Addresses conflicts of interest and prohibits contingent fees that could compromise objectivity.
   • Confidentiality: Protects the confidentiality of client information and appraisal results, with limited exceptions for legal requirements and peer review.
   • Record Keeping: Mandates the maintenance of detailed work files for each appraisal assignment, documenting the data, analysis, and reasoning used to arrive at the value conclusion.
     3. Competency Rule: Requires appraisers to possess the necessary knowledge and experience to perform an assignment competently. If an appraiser lacks competence in a particular area, they must either decline the assignment or take steps to acquire the necessary expertise, such as partnering with a competent appraiser.
     4. Scope of Work Rule: Emphasizes the importance of identifying the scope of work necessary to produce credible assignment results. The scope of work encompasses the extent of research, data analysis, and reporting required for a particular assignment. Appraisers are responsible for determining the appropriate scope of work, not the client.
     5. Jurisdictional Exception Rule: Allows for deviations from USPAP if required by applicable law or regulation.
     6. Definitions: Provides precise definitions of key appraisal terms.
     7. Standards 1-10: Establish specific requirements for various appraisal activities, including real property appraisal, appraisal review, mass appraisal, personal property appraisal, and business appraisal.

B. USPAP Standards: A Closer Look

Each USPAP Standard is a statement followed by Standard Rules:

1. Standard 1 & 2: Real Property Appraisal, Development & Reporting. Guidelines and requirements for developing an opinion of value and reporting it clearly.
2. Standard 3: Appraisal Review, Development & Reporting. Rules for reviewing another appraiser's work.
3. Standard 6: Mass Appraisal, Development & Reporting. Focuses on appraisal for ad valorem tax purposes (property tax).
4. Standard 7 & 8: Personal Property Appraisal, Development & Reporting. Addresses the appraisal of items like antiques, art, and collectibles.
5. Standard 9 & 10: Business Appraisal, Development & Reporting. Covers the valuation of businesses and business interests.

C. Advisory Opinions (AO)

The Appraisal Standards Board (ASB) also publishes Advisory Opinions. Advisory Opinions illustrate the application of the USPAP in particular situations, but do not have the binding effect of the USPAP.

D. Modifications of USPAP

The ASB has the authority to amend or modify the USPAP, as well as to issue Statements on Appraisal Standards and Advisory Opinions.

E. Introductory Provisions of the USPAP

There are seven introductory provisions:

1. Preamble
2. Ethics Rule
3. Competency Rule
4. Scope of Work
5. Jurisdictional Exception Rule
6. Definitions
7. Glossary (Removed)

V. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

FIRREA was a landmark piece of legislation enacted in response to the S&L crisis. It significantly reformed the financial regulatory system and established a framework for appraiser regulation.

A. Key Provisions of FIRREA

1. Mandatory Appraiser Licensing and Certification: FIRREA mandated that states establish systems for licensing and certifying real estate appraisers. This requirement applies to appraisals performed in connection with "federally related transactions," which include transactions involving federal financial institutions or agencies.

2. Establishment of The Appraisal Foundation: FIRREA formally recognized The Appraisal Foundation as the authority for developing and promoting appraisal standards and appraiser qualifications.

3. Creation of the Appraisal Subcommittee (ASC): FIRREA created the ASC to oversee state appraiser regulatory programs and ensure compliance with federal requirements. The ASC is composed of representatives from various federal financial regulatory agencies.

VI. State Appraiser Licensing and Certification

While FIRREA established the federal framework for appraiser regulation, the actual licensing and certification of appraisers are managed at the state level. States must meet minimum standards set by federal law, but they have the flexibility to impose stricter requirements.

A. Levels of Appraiser Licensing and Certification

Most states offer multiple levels of appraiser credentials, typically including:

1. Trainee Appraiser: An entry-level credential for individuals seeking to gain experience in the appraisal profession under the supervision of a certified appraiser.

2. Licensed Residential Appraiser: Authorized to appraise non-complex one-to-four unit residential properties with a transaction value below a specified threshold.

3. Certified Residential Appraiser: Authorized to appraise one-to-four unit residential properties regardless of transaction value or complexity. College level education requirements are a fundamental component of these changes. Applicants for a Residential license are required to have a minimum of 30 college semester units or an Associate’s degree; whereas applicants for either a Certified Residential or a Certified General license are required to have a Bachelor’s degree or higher.
   These requirements became effective for individuals seeking a real property appraiser credential after January 1, 2015. The requirements also apply to existing real property appraisers seeking to upgrade a license. Appraisers wishing to upgrade their license will have to meet the new criteria.

4. Certified General Appraiser: The highest level of appraiser credential, authorized to appraise all types of real property, including residential, commercial, industrial, and agricultural properties. College level education requirements are a fundamental component of these changes. Applicants for a Residential license are required to have a minimum of 30 college semester units or an Associate’s degree; whereas applicants for either a Certified Residential or a Certified General license are required to have a Bachelor’s degree or higher. These requirements became effective for individuals seeking a real property appraiser credential after January 1, 2015. The requirements also apply to existing real property appraisers seeking to upgrade a license. Appraisers wishing to upgrade their license will have to meet the new criteria.

B. Basic Education Requirements

Applicants must meet the basic education requirements before they can qualify for licensure.

To qualify for an appraiser license, applicants will have to complete a core curriculum for each license level as documented in Figure 14-3. Applicants must complete a minimum number of acceptable hours and specific modules (see Basic Education Modules as required by the Appraisal Qualifications Board (AQB). All applicants must successfully complete a 15-hour National Uniform Standards of Professional Appraisal Practice (USPAP) course or its equivalent as determined by the AQB.

C. Supervisory and Trainee Appraiser Requirements

Both supervisors and trainees are now required to complete an AQB approved Supervisory/Trainee Appraisers course.
Both the Trainee Appraiser and Supervisory Appraiser are required to complete an AQB approved Supervisory/Trainee Appraisers course. The Trainee Appraiser must complete the course prior to obtaining a Trainee Appraiser License, and the Supervisory Appraiser must complete the course prior to supervising a Trainee Appraiser. Existing credential holders can use this course regarding the roles and responsibilities of the Supervisor and Trainee Appraiser for continuing education.
Supervisory and Trainee affiliations established (meaning work was logged) prior to January 1, 2015, are “grandfathered” and the courses are not required.
A Supervisory Appraiser shall be state-certified and must be in “good standing” in the jurisdiction in which the Trainee Appraiser practices for a period of at least three (3) years. A Supervisory Appraiser may not supervise more than three (3) Trainee Appraisers at one time. However, a Trainee Appraiser is permitted to have any number of Supervisory Appraisers.

D. Licensing/Certification Process

The licensing/certification laws and regulations of each state must meet minimum standards set by federal law, but the states are free to impose their own stricter standards as well.
This is true both with respect to the standards of competence required for licensing or certification, and also with respect to the circumstances under which a license or certification is required.

The specific requirements vary from state to state, but generally include:

1. Education: Completion of specified appraisal coursework.
2. Experience: Accumulation of supervised appraisal experience hours.
3. Examination: Passing a state-administered appraisal examination.
4. Background Check: Submission to a criminal background check.

VII. Appraisal Management Companies (AMCs)

Appraisal Management Companies (AMCs) act as intermediaries between lenders and appraisers, managing the appraisal process to ensure independence and compliance with regulations. Federal guidelines now require banks to have a “firewall” between lenders and appraisers.
They help consumers obtain unbiased reports for financing and loan servicing.
When appraisal requests come in from the lending institution, the AMC assigns an appraiser to provide an appraisal report for the property.

The appraiser will provide an appraisal report based on the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines.

A. AMC Responsibilities

• Maintaining a panel of qualified appraisers.
• Assigning appraisal assignments to qualified appraisers.
• Ensuring appraiser independence.
• Reviewing appraisal reports for compliance with USPAP.

VIII. Errors and Omissions Insurance

Errors and Omissions Insurance covers liability for mistakes and information that was not provided but should have been. Error means mistake not intentional misrepresentation.

IX. National Association of Independent Fee Appraisers Code of Ethics

The National Association of Independent Fee Appraisers has their own code of ethics to ensure ethical standards for the professional.

A. Professional Conduct

A member shall conduct himself/herself at all times in a manner beneficial to the Association and to the community.

B. Fees

No appraisal fees may be contingent upon the valuation of an appraisal. All fees for trial testimony must be determined prior to the trial. No fees may be split without the full consent of all interested parties.

C. Appraisal Reports

Each appraisal must contain the following items in addition to all pertinent information known to the appraiser at the time of the appraisal:

• A statement as to purpose and/or objectives of the appraisal, with value defined.
• A legal description and/or adequate identification of the property appraised.
• The date of the value estimate, the date at which the value estimate applies.
• An adequate description of the physical characteristics of the property appraised.
• A statement as to the known and/or observed encumbrances, if applicable.
• A statement and analysis of the highest and best use of the property appraised, if appropriate.
• As statement as to the property rights appraised.
• A direct sales comparison approach and analysis, if applicable.
• A cost approach and analysis, if applicable.
• An income approach and analysis, if applicable.
• A statement as to the conclusions reached in the appraisal report.
• Documentation requirements (the appraiser must have the minimum data requirements in his/her file to property support the final estimate of value).
• A statement as to the assumption and limiting conditions affecting the appraisal.
• The signature of the responsible appraiser together with his/her particular designation (IFA, IFAA, IFAS, IFAC).
• A statement concerning the maintenance of confidentiality regarding the Appraisal assignment and results thereof.

Designated members (IFA, IFAA, IFAS, IFAC) must disclose continuing education status clearly in every appraisal report.

Appraisal reports must not include:

• Improbable and non supportable premises.
• Vague assumptions unsupported by fact.
• Improbable highest and best use.

D. Certification Statement

The certification of each appraisal must contain the statement: “This appraisal has been prepared in conformity with the code of ethics of the National Association of Independent Fee Appraisers, and the Uniform Standards of Professional Appraisal Practice as promulgated by the Appraisal Foundation.” On printed forms supplied or required by client, the appraiser is bound by the above code and certification even though the statement is not contained therein.

E. Professional Practice

It is unethical for an appraiser to do the following:

• Conduct himself/herself in any manner which will prejudice his/her professional status or the reputation of any appraisal organization with which he/she is connected.
• Compete unfairly with other appraisers.
• Injure by falsification or by malice, directly or indirectly, the professional reputation, prospects or business of any other appraiser.
• Fail to report to the Association the actions of any member who, the option of the reporting member, has violated this code of ethics.
• Advertise or solicit appraisal business an any manner not consonant with accepted professional practice.
• Reveal in any way the substance of any appraisal without permission of the client or due process of law.
• Issue a separate appraisal report when another appraiser assigned to appraise the property has had a part in the formation of the opinion of value.
• Issue an appraisal report on only a part of a whole property without stating that it is a factional appraisal; and, as such, subject to use in a manner consistent with such limitations.
• Accept an assignment to appraise a property of a type with which he/she has had no previous experience unless in making the appraisal, he/she associates himself/herself with an appraiser who has had experience with the type of property being appraised; or, make full disclosure of the degree of his/ her experience, background and training to his/her client.

X. Conclusion

USPAP, FIRREA, and state licensing requirements collectively form the foundation of a well-regulated and ethical appraisal profession. By adhering to these standards and regulations, appraisers can ensure that their opinions of value are credible, reliable, and unbiased, thereby protecting the interests of consumers, lenders, and the overall financial system. Continuous education, ethical conduct, and a commitment to professional excellence are essential for appraisers to thrive in this dynamic and critical field.

ملخص:

This chapter, "Appraisal Regulations & Standards: USPAP, FIRREA, & Licensing," within the "Real Estate Appraisal: Navigating Federal Regulations & Market Standards" training course, provides a comprehensive overview of the regulatory framework governing the appraisal profession. The central scientific points, conclusions, and implications are summarized as follows:

Main Scientific Points:

• The Evolution of Appraisal Regulation: The chapter traces the historical development of appraisal regulations, highlighting the shift from a largely unregulated profession prior to the 1980s to a heavily regulated industry in response to the Savings and Loan crisis. This demonstrates the reactive nature of regulation in response to market failures.
• The Role of the Appraisal Foundation: The establishment and functions of the Appraisal Foundation (TAF) are examined, emphasizing its critical role in fostering professionalism and public trust through the development and promotion of appraisal standards and appraiser qualifications. TAF acts as a self-regulatory body with influence over the entire appraisal profession.
• USPAP as a Standardized Framework: The Uniform Standards of Professional Appraisal Practice (USPAP) is presented as the cornerstone of appraisal practice, providing a standardized framework for appraisal development, reporting, and review. Its core components include the Ethics Rule, Competency Rule, Scope of Work Rule, and specific standards for various appraisal types (real property, personal property, business).
• FIRREA's Impact: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) is identified as the landmark legislation that mandated state licensing and certification of appraisers for federally related transactions. This act effectively federalized the appraisal industry, setting minimum standards while allowing states to impose stricter requirements.
• Licensing and Certification Requirements: The chapter details the varying education, experience, and examination requirements for different appraiser license levels (Trainee, Residential, Certified Residential, and Certified General), as set forth by the Appraiser Qualifications Board (AQB) of The Appraisal Foundation. It highlights the increasing emphasis on college education and specialized coursework.
• The Importance of Continuing Education: Appraisers must remain up-to-date on the latest standards and regulations to ensure their work conforms to USPAP. This is accomplished through continuing education and subscription services from the Appraisal Foundation.
• The Appraisal Management Company (AMC) Role: The chapter identifies the role of Appraisal Management Companies as a buffer between lenders and appraisers in order to ensure an unbiased report.

Conclusions:

• Regulation Enhances Appraisal Quality: The increased regulation of the appraisal profession, particularly through USPAP and FIRREA, has significantly enhanced the quality, reliability, and consistency of appraisal reports, thereby contributing to the stability of financial markets.
• USPAP is Essential: Adherence to USPAP is crucial for appraisers to maintain professional credibility, avoid ethical violations, and minimize legal liability. The USPAP provides rules for appraisers to perform their duties with integrity.
• Professionalism is Critical: The appraisal profession is built on the principles of integrity, objectivity, and independent judgment. A failure to adhere to these principles can undermine public trust and contribute to financial instability.

Implications:

• Economic Stability: Sound appraisal practices are essential for informed decision-making in real estate transactions, which in turn contributes to the overall health and stability of the economy.
• Consumer Protection: Licensing and certification requirements protect consumers by ensuring that appraisers possess the necessary knowledge and skills to provide accurate and reliable valuations.
• Risk Management: Appraisers, lenders, and other stakeholders must stay informed about evolving regulations and standards to effectively manage risks associated with real estate transactions.
• Dynamic Regulatory Landscape: The appraisal industry is subject to ongoing regulatory changes, necessitating continuous professional development and adaptation by appraisers.
• State Level Compliance: While FIRREA establishes minimum standards, appraisers must be aware of and comply with the specific licensing and certification requirements in each state where they practice.

In essence, this chapter underscores the importance of a well-regulated appraisal profession in maintaining market integrity, protecting consumers, and fostering economic stability. It emphasizes the critical roles of USPAP, FIRREA, and state licensing agencies in ensuring that appraisers are qualified, ethical, and competent.