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During the 1980s real estate crisis, flawed and fraudulent appraisals sometimes masked the risk in speculative real estate loans at federally insured institutions. At that time there were no universally accepted appraisal content standards, no system of licensing appraisers, no appraiser education and experience qualification standards, and no laws requiring the use of appraisals. The underwriting of high-risk real estate projects supported by misleading and poorly documented appraisals contributed significantly to the insolvency of many banks and savings and loans during this time.1 In response, Congress passed the appraisal reform provisions of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
In part, Title XI mandated the development of a regulatory structure built on state agencies with the authority to sanction appraisers who do not conform to appraisal standards (see box, "An Overview of the Appraisal Regulatory Framework"). These state appraiser agencies have pursued disciplinary actions against certain appraisers. The National Registry database, a comprehensive source of information on disciplinary actions that have been brought against individual appraisers, shows that since 1994 the states have imposed 630 suspensions, 725 revocations, 230 voluntary surrenders in lieu of disciplinary action, and 4,440 other actions such as fines, remedial education, and probationary periods.2 These statistics represent a relatively high number of sanctions in relation to the nation's 79,000 state licensed and certified appraisers, demonstrating how critical the appraiser referral process is to maintaining the quality of the profession.3
Bank examiners play a key role in alerting state agencies to inappropriate appraiser activity. Title XI charges the Federal Deposit Insurance Corporation (FDIC) and the other federal bank and thrift regulatory agencies with making referrals of appraisers who have submitted flawed appraisals.4 In certain situations, the agencies also have the authority to sanction appraisers directly.5 This article explains when and how appraiser referrals are made and provides an overview of the appraiser referral process at the FDIC.
When an Appraiser Referral Should Be Made
An examiner makes a referral to a state appraiser agency when an appraiser is involved in ethical violations or the appraisal does not comply with the procedures in the Uniform Standards of Professional Appraisal Practice (USPAP). The USPAP, the generally accepted standards for professional appraisal practice in North America, is referenced in Title XI, the appraisal regulations implemented by the federal banking agencies, and state laws as the source for appraisal standards. Table 1 summarizes situations that typically prompt a referral to a state appraiser agency.
The information in Table 1 is not all-inclusive. A referral also should be considered when an appraiser's failure to use standard appraisal methodology in compliance with the USPAP could reasonably be expected to result in a state disciplinary action. It is important to note that not all mistakes or inadequate documentation require a referral. Common typographical and clerical errors that do not affect the assigned value of the property should not be referred unless a pattern or practice of exceptions on a number of appraisals is identified.
Once the decision has been made to initiate a referral to a state appraiser agency, field examiners and other FDIC regional office staff work together. The steps in processing an appraiser referral are outlined in the box entitled "Processing an Appraiser Referral at the FDIC."
Enforcement and Criminal Referrals
Title XI of FIRREA also granted the federal banking agencies authority to sanction appraisers directly. An FDIC regional office would consider an enforcement action when an appraiser participates in a violation of law or regulation, breach of fiduciary duty, or unsafe or unsound practice that causes a financial loss to an insured depository institution. For example, if a flawed real estate appraisal contributed to identifiable loss or exposure to loss in classified and charged-off loans, other real estate, or restructured troubled debt, an enforcement action could result. In addition, if an appraisal is used to defraud an insured financial institution, the appraiser could be referred to law enforcement authorities on a Suspicious Activity Report Form.10
The FDIC's Experience
FDIC regional offices have reviewed and forwarded referrals to state appraiser agencies since the early 1990s. Much less commonly, the FDIC also has initiated enforcement actions and made criminal referrals. Generally, referral activity has been greater in geographic areas where insured financial institutions are experiencing problems. The existence of flawed or fraudulent appraisals becomes more apparent to examiners when lax underwriting standards contribute to a higher volume of real estate credits that reach nonperforming status. At that point, examiners are scrutinizing loans in default more closely.
The FDIC has issued enforcement actions and criminal referrals involving egregious conduct on the part of appraisers. For example, in Kansas and Missouri during the mid-1990s, the FDIC determined that appraisers were submitting property valuations to fit a specific bank's loan requirements. In this situation, loan officers supplied the necessary information as well as target appraisal values. In addition to inflating the value of the properties, the appraisals did not comply with the USPAP. In some instances, the FDIC could prove that the appraiser had not inspected the property, despite having stated so in the appraisal. The FDIC banned the appraisers from the business of banking, and the state appraiser authorities took appropriate disciplinary action.
In 2004, a bank funded a $440,000 loan to a borrower to purchase a 24-unit apartment complex. The borrower failed to make the first payment, and the bank foreclosed on the property. A real estate appraisal performed for the loan showed an "as is" fee simple interest market value of $585,000. A second appraisal performed six months later by another appraiser estimated the market value "as is" at $230,000. Clearly, the two appraisals differed significantly. Conflicting information was provided about the number of buildings on the property, number of stories in each building, landscaping on the property, occupancy rate, the year the property was built, the owner of record of the property, whether the property was boarded up and tagged for back taxes, and whether the property was inhabitable. In this case, the FDIC did not make a criminal referral because the bank had reported the possible criminal activity to the authorities.
A System That Works
Title XI of FIRREA resulted in the development and implementation of a regulatory structure that mandates close supervision of real estate appraisers. The referral process helps ensure the early identification and sanctioning of appraisers who are not complying with applicable regulations. As a result, lenders and borrowers at insured institutions can have greater confidence in the appraisal valuations they are receiving.
1 Federal Deposit Insurance Corporation, History of the Eighties—Lessons for the Future. Vol. I: An Examination of the Banking Crises of the 1980s and Early 1990s, Washington, DC: FDIC, 1997, pp. 156-158.
2 Title XI created a National Registry of state licensed and certified appraisers that is maintained by the Appraisal Subcommittee. The Registry, available on the Internet, allows the public to determine whether a person is certified or licensed to perform appraisals in connection with federally related transactions and whether that person's credential has been suspended, revoked or surrendered in lieu of state enforcement action.
4 Title XI, Section 1119(c): "The Appraisal Subcommittee, any other Federal agency or instrumentality, or any federally recognized entity shall report any action of a State certified or licensed appraiser that is contrary to the purposes of this title, to the appropriate State agency for a disposition of the subject of the referral."
7 Statement on Appraisal Standards No. 10, FIL-20-2001, March 7, 2001.
9 Title XI recognizes two types of appraisers: certified and licensed. In general, certified appraisers are more knowledgeable and experienced than licensed appraisers.
10 The Bank Fraud Statute, 18 U.S.C. 1344, makes it a crime to defraud an insured financial institution. Loans based on fraudulent appraisals could be referred to law enforcement authorities on a Suspicious Activity Report Form prescribed pursuant to Part 353 of the FDIC Rules and Regulations.
|Last Updated 12/01/2004||SupervisoryJournal@fdic.gov|