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Lending Real Estate

Here's why states should choose to not regulate appraisal management companies

Are you considering an AMC program?

February 15, 2016

Across the country, state legislatures and appraisal licensing boards are grappling with the decision of whether or not to regulate - and if so, how - appraisal management companies (AMC’s).

As it relates to AMC’s, Dodd-Frank rule making was assigned to the Interagency Institutions, and the Final Rule was published this past summer providing the ground rules for how a state can form a regulatory program. States are not required to have a program at all; however, if states choose to not regulate them, AMC’s are banned from Federally Related Transactions (FRT’s) in that state.

According to estimates, 60% of FRT appraisal work is completed through AMC’s. Should a state not form a regulatory program, lenders would have three options for completing these appraisals:

  1. Engage appraisers directly (through a department separate from origination)
  2. Employ an AMC under the panel threshold (the AMC can’t oversee more than 15 appraisers in a state or 25 in two or more states)
  3. Utilize an AMC that is wholly owned and operated by a lending institution with federal oversight

If the 60% estimate is to be believed, then 40% of FRT appraisal work is already being completed via option 1. The elimination of AMC’s, though not the intent here, is a debatable consequence as it relates to FRT’s; the Interagencies are currently working to provide clarity on which loans, if any, actually meet the FRT definition.

But even if AMC’s are barred from the majority of lender-related appraisal work, that’s an imposition borne of federal law, not from the states. Appraisers should also be aware that the protections they seek as it relates to customary and reasonable fees already exist in federal law and are binding on lenders.

Also, the Appraisal Subcommittee (ASC) Hotline is and will remain available to appraisers who feel their appraisal independence is being jeopardized by a lender or AMC, regardless of the existence of state regulation.

In Florida, AMC legislation has been effective since 2011 and not a single complaint has reached board disciplinary level. While a few states have seen AMC disciplinary action, each of the actions I’ve seen relate to customary and reasonable fees or appraisal independence – activities already regulated at the federal level.

These federal regulations exist and will continue to exist regardless of the decisions of individual states. What concerns me more as a state would be making a decision to regulate a business (AMC’s) simply to ensure that business’ participation in statewide activities (FRT appraisals). That’s backward and sounds more like cronyism than a principled approach to regulation.

Florida Rule 61J1-9.001 is the rule addressing standards of practice for appraisers in Florida. It basically says, see USPAP. Why is that? Because there are recognized standards of practice within the appraisal industry.

There are no recognized standards of practice for AMC’s. USPAP does not apply to AMC’s. When an industry seeks legitimacy and moves from a trade to a profession, they create standards of practice. After all, that was the evolutionary course of the appraisal industry. It would seem to me that standards of practice should be a precursor to any effective regulatory program.

The AMC and Appraisal Management Services definitions can be found in the Final Rule (see prior link). Appraisal reviews are already regulated by the state. So the only AMC activities not already regulated at the state level are nebulous activities like ‘managing processes’, and ‘performing administrative tasks’. Do those sound like professional services warranting state regulation?

What’s fascinating in this discussion is that my opinion on this is the same position AMC’s shared when rule-making was undertaken in Florida three years ago. But now that the Final Rule places a regulatory compulsion on states in order for AMC’s to participate in FRT’s, AMC’s are advocating for state regulation.

And many appraisers are understandably so exasperated with the state of the industry, that they see AMC regulation as their opportunity to ‘fight back’ – not realizing that states issuing licenses to AMC‘s is not the remedy they seek.

We now have the benefit of hindsight and the final rules outlining the parameters for an AMC regulatory construct. That knowledge was not available prior to the June 2015 issuance of the Final Rule or when states where initially setting up their AMC regulatory programs.

In my opinion as a regulator of one of the 38 states that in good faith launched an AMC regulatory program prior to having the ‘full picture’ via the Final Rule, we would have done things much differently in Florida.

States considering an AMC program, or those like Florida with an existing program, should carefully read the fine print and consider whether an AMC regulatory program is truly in the interest of public trust, or if it exacerbates the problems. 

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