Appraisal Regulation and Ethics

Chapter: Appraisal Regulation and Ethics

Introduction

This chapter explores the regulatory landscape and ethical considerations that govern the real estate appraisal❓❓ profession. It delves into the historical context of appraisal regulation, the roles of key organizations, and the ethical principles that guide appraisers in their professional practice. Understanding these aspects is crucial for maintaining the integrity and reliability of appraisal services.

1. Historical Context of Appraisal Regulation

• Pre-1990 Era: Before 1990, appraisal regulation was minimal, with limited educational requirements or professional oversight in most states. The term “appraiser” was loosely defined, leading to inconsistencies in quality and credibility. Professional designations from trade associations like the Society of Real Estate Appraisers and the American Institute of Real Estate Appraisers (AIREA) were the primary means of identifying qualified appraisers. However, public awareness of these designations and their requirements was limited.

• Savings and Loan Crisis and FIRREA (1989): The Savings and Loan Crisis of the late 1980s exposed significant weaknesses in the appraisal process. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 was enacted in response. FIRREA mandated that appraisals for federally related transactions (FRTs) be performed by state-licensed or state-certified appraisers.

  • Federally Related Transaction (FRT): Any real estate-related financial transaction that a Federal Financial Institutions Regulatory Agency (FFIRA) engages in, contracts for, or regulates, and that requires the services of an appraiser.

• State Implementation: FIRREA charged each state with establishing an agency to regulate appraisal licensing and certification. Many states extended these requirements to all appraisals, regardless of federal involvement.

2. Key Organizations and Their Roles

• The Appraisal Foundation (TAF): Established by FIRREA to set appraisal rules and minimum qualifications for state programs. TAF is a non-profit organization directed by a board of trustees. Its two main boards are:

  • The Appraiser Qualifications Board (AQB): Sets minimum education and experience requirements for licensing and certification. It also establishes the exam content outline used by states to guide curriculum development.

    • Example: The AQB might require a minimum of 150 classroom hours❓ of specific appraisal coursework for a Certified Residential Appraiser license.

    • Formula Example:

      • Total Required Education = Basic Appraisal Principles (30 hours) + Basic Appraisal Procedures (30 hours) + Residential Market Analysis and Highest & Best Use (15 hours) + Residential Appraisal Report Writing (15 hours) + USPAP (15 hours) + Electives (45 hours)

  • The Appraisal Standards Board (ASB): Writes, edits, and amends the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP, while not law itself, becomes legally binding through adoption by state, local, and federal agencies.

    • Practical Application: USPAP Standard 1 requires appraisers to identify the problem to be solved, including the purpose and intended use of the appraisal, definition of value, effective date, and relevant property characteristics.

• Appraisal Subcommittee (ASC): A governmental regulating arm of the Federal Financial Institutions Examination Council (FFIEC). The ASC ensures that state programs comply with federal requirements through periodic audits.

  • Consequences of Non-Compliance: State programs that fail to comply with federal requirements can be decertified, rendering their appraisers ineligible for FRTs.

3. Types of Appraisal Licenses and Certifications

• Trainee, Registered, or Associate Appraiser: Usually involves an apprenticeship period. Scope of work may be limited depending on the state and supervisor’s license.

• Licensed Residential Appraiser: Typically limited to one- to four-unit properties with loans less than $1 million (transaction value). Can also perform non-FRTs such as divorce settlements or estate settlements.

• Certified Residential Appraiser: Limited to one- to four-unit properties but with no transaction value limits. Can also perform non-FRTs. Some states may allow non-residential work on non-FRTs.

• Certified General Appraiser: Authorized to appraise any type of property.

  • Important Note: License or certification does not automatically guarantee competency. A Certified General Appraiser may not be competent in appraising a specific property type, size, or location.

4. Ethical Considerations for Appraisers

• Disinterested Third Party: Appraisers must act as disinterested third parties, treating clients and intended users with fairness and ethical behavior. Unlike attorneys or real estate brokers who may advocate for their clients, appraisers have obligations to all intended users of their work.

• Client Pressure: Appraisers face client pressure to produce predetermined or biased opinions of value. Succumbing to this pressure is unethical.

  • Example: A client asking an appraiser to “hide the negatives” and “highlight the positives” in their report.

• Compensation and Incentives: Appraisers should be compensated in a manner that avoids any incentive or the appearance of an incentive for deceptive practices.

  • Unethical Example: Being paid only if a mortgage loan closes, creating an incentive to overlook negative information that might jeopardize the loan.

• Conflicts of Interest: Appraisers may not accept assignments in which they have a bias toward the property or parties involved or a monetary incentive to provide a predetermined or biased opinion of value.

  • Example: Accepting appraisal assignments from a spouse who is a loan originator paid on commission.

• Advocacy: Representing the cause or interest of another, even if that cause or interest does not necessarily coincide with one’s own beliefs, opinions, conclusions, or recommendations. This is inappropriate for an appraiser who must remain objective.

5. USPAP and Ethical Conduct

• USPAP as a Framework: The Uniform Standards of Professional Appraisal Practice (USPAP) provides a comprehensive framework for ethical conduct. Compliance with USPAP is essential for maintaining professional integrity and avoiding disciplinary action.

• Key USPAP Rules Related to Ethics:

  • Ethics Rule: Requires appraisers to promote and preserve public trust.

  • Competency Rule: Requires appraisers to have the knowledge and experience necessary to perform an assignment competently, or to take steps to become competent.

  • Record Keeping Rule: Appraisers must prepare and maintain workfiles that are adequate to support their opinions and conclusions.

  • Confidentiality Rule: Appraisers must protect the confidential information of their clients.

6. Practical Applications and Examples

• Scenario 1: Undisclosed Conflict of Interest

  • An appraiser accepts an assignment to appraise a property owned by a close relative without disclosing the relationship to the client. This violates the ethics rule and creates a conflict of interest.

• Scenario 2: Pressure to Inflate Value

  • A loan officer pressures an appraiser to increase the appraised value of a property to ensure the loan is approved. The appraiser complies, knowing the value is not supported by market data. This is a clear violation of USPAP and ethical standards.

• Scenario 3: Inadequate Competency

  • An appraiser who primarily appraises residential properties accepts an assignment to appraise a complex industrial facility without having the necessary experience or expertise. This violates the competency rule.

7. Mathematical Considerations (Illustrative Examples)

• Discounted Cash Flow (DCF) Analysis: In income-producing properties, appraisers often use DCF analysis to determine present value. Ethical considerations arise when manipulating variables (such as discount rate or projected cash flows) to achieve a predetermined value.

  • Present Value (PV) = Σ [Cash Flow (CFt) / (1 + Discount Rate (r))^t] where t = time period. Intentionally altering CFt or r to manipulate PV is unethical.

• Regression Analysis: Appraisers may use regression analysis to identify factors that influence property values. Ethical considerations involve the selection of appropriate variables and the proper interpretation of results to avoid biased conclusions.

  • Y = a + b1X1 + b2X2 + … + ε where Y is the dependent variable (e.g., sale price), X is the independent variable, b is the coefficient, a is the intercept, and ε is the error term. Manipulating the regression model to create a desired result is unethical.

Conclusion

Appraisal regulation and ethics are fundamental pillars of the real estate industry. Understanding the historical context, the roles of key organizations like TAF, AQB, and ASB, and adhering to USPAP guidelines are crucial for maintaining professional integrity. Ethical considerations encompass objectivity, avoiding conflicts of interest, and resisting client pressure. By upholding these standards, appraisers contribute to the stability and transparency of the real estate market.