“I think not many people understand how this byzantine system works,” Rohit Chopra, the Consumer Financial Protection Bureau (CFPB) director, said Tuesday.
Chopra spoke during the first-ever Federal Financial Institutions Examination Council’s Appraisal Subcommittee (ASC) hearing, which focused on appraisal bias.
The CFPB director borrowed the term byzantine from a report released in January 2022, commissioned by the Appraisal Subcommittee and led by the National Fair Housing Alliance. The report’s main conclusion is that the appraisal industry essentially regulates itself, in contrast to other sectors in housing finance.
It happens because the Appraisal Foundation, an industry-run private nonprofit, establishes standards and criteria for appraisers, which are then adopted by each state. However, appraisers, lenders, banking institutions and industry trade groups dominate the seats on the Foundation board. There are no consumers or fair housing advocates.
During the hearing, Craig Steinley, president of the Appraisal Institute, said that individual appraisers do not pay fees for the Appraisal Foundation. “It’s not a membership organization of individuals. It’s a membership organization of other organizations. We do [pay fees] by the standard materials from the Foundation.”
In response, Chopra said: “I think it’s something we need to think about whether it is appropriate for this type of fee structure and for there to be payments, including related to governance. I think that raises a lot of questions: for this Subcommittee, for the regulators and potentially for future hearings.”
Increasing accountability to decrease appraisal bias
While Congress tasks the Appraisal Subcommittee with monitoring and reviewing the Appraisal Foundation, it has no enforcement authority.
The Subcommittee is an independent executive branch with seven members on the board, including representatives from the Federal Reserve and the Office of the Comptroller of the Currency. The Subcommittee has authority over the state programs on appraisals.
“We conduct regular compliance reviews of the state programs to determine their level of compliance with the Appraisal Foundation and other federal requirements,” Jim Park, the ASC executive director, said during the hearing. “If a state is found to be out of compliance, the ASC has the enforcement authority to ensure they return to compliance.”
Park added, “However, the ASC oversight authority over the Foundation is limited to monitoring and reviewing their work. The ASC has no enforcement authority as it relates to the Foundation or its boards.”
According to Junia Howell, visiting assistant professor of sociology at the University of Illinois Chicago, there’s a “moral” problem with the current structure.
“As Director Park said at the beginning, there’s not a single other regulatory structure like this in the country, and maybe even in the world,” Howell said. “I would suggest that there needs to be a different structure that possibly increases some accountability.”
The Mortgage Bankers Association (MBA), the trade group representing mortgage lenders in the discussion, agrees with the need for changes.
“The MBA would support reforms which would lead to more independent oversight of appraisers,” Michael Fratantoni, MBA’s senior vice president of research and technology and chief economist, said.