Foundations of Modern Appraisal: FIRREA, USPAP, and Tech Adoption

Chapter 1: Foundations of Modern Appraisal: FIRREA, USPAP, and Tech Adoption

Introduction:

This chapter lays the groundwork for understanding the modern appraisal landscape. It explores the historical context that led to increased regulation and standardization, focusing on the pivotal role of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and the subsequent development and implementation of the Uniform Standards of Professional Appraisal Practice (USPAP). Furthermore, this chapter introduces the profound impact of technological advancements on the appraisal profession.

I. The Pre-FIRREA Appraisal Environment:

Prior to the late 1980s, the appraisal industry was characterized by limited regulation and a lack of uniform standards. While professional organizations existed and provided some guidance, there was no nationwide requirement for appraiser qualification or adherence to consistent appraisal practices. This lack of oversight contributed to inconsistencies in appraisal quality and, in some cases, facilitated fraudulent or misleading valuations, particularly in the context of the burgeoning Savings and Loan (S&L) crisis.

II. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA):

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 represented a watershed moment for the appraisal profession. Enacted in response to the S&L crisis, FIRREA aimed to reform and regulate the financial industry, with a significant focus on ensuring the integrity and reliability of real estate appraisals. The act introduced several key provisions that fundamentally altered the appraisal landscape:

• A. Title XI – Real Estate Appraisal Reform Amendments: Title XI of FIRREA specifically addressed real estate appraisal reform. Its central objectives were to:

  1. Establish State Licensing and Certification: FIRREA mandated that states establish systems for licensing and certifying real estate appraisers. This requirement aimed to ensure that individuals performing appraisals in connection with federally related transactions possessed the necessary qualifications and competence.
  2. Create Nationwide Competency Standards: FIRREA required the establishment of nationwide competency standards for appraisers. This provision sought to promote consistency in appraisal knowledge and skills across different states. The modern standard now includes a four-year degree requirement.
  3. Promulgate Uniform Standards of Professional Appraisal Practice (USPAP): FIRREA directed federal financial institutions regulatory agencies to prescribe standards for real estate appraisals in connection with federally related transactions. These standards were to be based on generally accepted appraisal principles, as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation.

• B. The Appraisal Foundation: In response to FIRREA, prominent appraisal organizations collaborated to establish the Appraisal Foundation. This non-profit organization plays a crucial role in setting appraisal standards and appraiser qualification criteria.

  1. Appraiser Qualifications Board (AQB): The AQB establishes minimum education, experience, and examination requirements for appraiser licensing and certification. These requirements are regularly updated to reflect evolving appraisal practices and market conditions.
  2. Appraisal Standards Board (ASB): The ASB is responsible for developing, interpreting, and revising USPAP. USPAP provides a comprehensive framework for ethical and competent appraisal practice.

• C. Federally Related Transactions: FIRREA’s requirements primarily apply to “federally related transactions,” which are defined as real estate-related financial transactions that:

  (A) A federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates; and
  (B) Requires the services of an appraiser.

  Exemptions exist for residential transactions of \$250,000 or less and nonresidential transactions of \$1 million or less.

• D. Appraisal Subcommittee (ASC): The ASC monitors state appraiser regulatory agencies and the Appraisal Foundation, ensuring compliance with FIRREA and related regulations. The ASC also oversees the Federal financial institutions regulatory agencies.

III. Uniform Standards of Professional Appraisal Practice (USPAP):

USPAP is the cornerstone of modern appraisal practice. It provides a comprehensive set of standards for ethical and competent appraisal performance. Compliance with USPAP is mandatory for appraisers performing appraisals in connection with federally related transactions and is often required by other clients and regulatory bodies.

• A. Key Components of USPAP: USPAP consists of several key components, including:

  1. ethics rule❓❓: The Ethics Rule establishes fundamental principles of ethical conduct for appraisers, including impartiality, objectivity, and confidentiality.
  2. Competency Rule: The Competency Rule requires appraisers to possess the necessary knowledge and skills to perform an appraisal assignment competently. If an appraiser lacks competence in a particular area, they must take steps to acquire the necessary expertise or decline the assignment.
  3. Scope of Work Rule: The Scope of Work Rule requires appraisers to identify the problem to be solved, determine the appropriate scope of work, and disclose the scope of work in the appraisal report. The scope of work must be sufficient to produce credible assignment results.
  4. Jurisdictional Exception Rule: The Jurisdictional Exception Rule allows appraisers to depart from certain USPAP requirements if compliance would violate applicable law or regulation.
  5. Standards 1-10: These standards provide specific guidance for the development and reporting of appraisals for various property types and appraisal purposes.

• B. Intended Use, Intended Users, and Standard of Value: Understanding these concepts is crucial for defining the scope of work and ensuring the appraisal is relevant to the client’s needs.

  1. Intended Use: Refers to how the client plans to utilize the appraisal. (e.g., mortgage lending, estate settlement, property tax assessment).
  2. Intended Users: Identifies the parties who will rely on the appraisal (e.g., the lender, the borrower, a government agency).
  3. Standard of Value: Specifies the type of value being sought (e.g., market value, insurance value, investment value).

• C. Advisory Opinions: These offer guidance on applying USPAP to specific scenarios. They do not establish new standards but illustrate existing ones.

• D. Statements: Clarify the application of standards in diverse contexts.

IV. Technology Adoption in Modern Appraisal:

The appraisal profession has undergone a significant transformation in recent years due to the rapid advancement of technology. These advancements have impacted nearly every aspect of the appraisal process, from data collection to report generation.

• A. “FinTech” and Mobile Technology: The emergence of “FinTech,” or Financial Technology, has revolutionized the appraisal process. Mobile devices have effectively replaced clipboards and significantly enhanced efficiency and accuracy.

  1. Increased Speed: Mobile technology allows appraisers to begin gathering and inputting data before even arriving at the subject property. Information can be synced between office staff and the appraiser’s device in real-time, saving valuable time.

  Formula Example: Time Saved = T_manual - T_mobile, where T_manual is the time spent on manual data entry and T_mobile is the time spent using mobile data entry.

  2. Enhanced Accuracy: Electronic forms and data syncing minimize human error. Data entered in one form automatically populates other related forms, ensuring consistency. Digital sketching tools provide more accurate property diagrams than manual drawings. Up-to-date comparable sales data is readily available, and voice notes allow for detailed recording and review of observations.

  Experiment Example: Compare the error rate of manually sketched property diagrams versus digitally created diagrams using surveying software. Measure the deviation from actual property dimensions.

  3. Cost Reduction: By increasing efficiency and accuracy, technology helps appraisers complete more appraisals in less time, leading to increased revenue and reduced overhead costs.

  4. Streamlined Payments: Mobile payment applications enable appraisers to collect fees on-site, eliminating delays associated with traditional payment methods.

• B. Data Analytics and Automation: Advanced data analytics tools allow appraisers to analyze large datasets of market information, identify trends, and support their value conclusions. Automation features can streamline tasks such as report formatting and comparable selection.

  Concept Example: Applying regression analysis (y = a + bx + e) to comparable sales data to determine the impact of various property characteristics (x) on sales price (y). This aids in more objective adjustments.

• C. Geographic Information Systems (GIS): GIS technology provides appraisers with powerful tools for mapping and analyzing property data, including location, zoning, and environmental factors.

  Practical Application: Using GIS to identify comparable sales within a specific distance of the subject property, taking into account factors such as traffic patterns and neighborhood boundaries.

• D. Artificial Intelligence (AI) and Machine Learning (ML): AI and ML technologies are increasingly being used in appraisal to automate tasks such as property identification, data extraction, and value estimation. While these technologies have the potential to improve efficiency and accuracy, it is crucial for appraisers to understand their limitations and exercise professional judgment.

V. Conclusion:

FIRREA and USPAP have established a foundation for a more regulated and standardized appraisal profession. The adoption of technology has further transformed the industry, enabling appraisers to work more efficiently, accurately, and effectively. As the appraisal landscape continues to evolve, it is essential for appraisers to stay informed about regulatory changes, technological advancements, and best practices to ensure they provide credible and reliable valuation services.