Among other things, ASC is responsible for (1)  monitoring and reviewing the practices, procedures, activities, and  organizational structure of the Appraisal Foundation—including  making grants to the Foundation in amounts that it deems appropriate  to help defray costs associated with its Title XI activities; (2)  monitoring the requirements established by the states and their  appraiser regulatory agencies for the certification and licensing of  appraisers; (3) monitoring the requirements established by the federal  financial institutions regulators regarding appraisal standards for  federally related transactions and determinations of which federally  related transactions will require the services of state-licensed or - certified appraisers; and (4) maintaining a national registry of state- licensed and -certified appraisers who may perform appraisals in  connection with federally related transactions. Among other  responsibilities and authorities, the Dodd-Frank Act requires ASC to  implement a national appraiser complaint hotline and provides ASC  with limited rulemaking authority. Several Weaknesses Have Potentially Limited ASC’s Effectiveness in Performing Its Title XI Functions

ASC has been performing its monitoring role under Title XI, but several  weaknesses have potentially limited its effectiveness. As of October 2011, ASC had  completed several tasks that required no rulemaking or creation of new  programs and was in various stages of progress on the others. ASC has not fully addressed this requirement  but has researched how other agencies operate hotlines and make  complaint referrals. These included giving appraisers  a central place to report when they feel they are being pressured,  providing a conduit to forward complaints to appropriate entities,  promoting the development of more uniform complaint and complaint  follow-up procedures, and providing ASC with information that could be  useful for its state and appraiser enforcement efforts. For example, some state appraiser  regulatory agencies report to other agencies that control budget and  policy decisions. According to ASC officials, revenue from registry fees  allowed ASC to carry out its Title XI responsibilities and accumulate  approximately $6 million in reserves by fiscal year 2008. Most Recent Mortgages Were Below the Threshold for Appraisal Exemption, and Stakeholder Views on the Threshold Vary

Our analysis of HMDA data found that approximately 71 percent of first- lien mortgages for single-family (one- to four-unit) homes originated from  calendar years 2006 through 2009 were less than or equal to $250,000— the regulatory threshold at or below which appraisals are not required for  federally related transactions. Despite the sizable proportion of residential mortgages at or below  $250,000, the threshold has had limited impact in recent years on the  percentage of mortgages with an appraisal because mortgage lenders,  investors, and insurers generally require them for mortgages, regardless  of amount. However, whether the private  market will require appraisals for mortgages below the threshold is  unclear at this time. A few of these stakeholders stated that  lowering the threshold would potentially require more homebuyers to pay  for appraisals, which are generally more expensive than other valuation  methods. appraisal industry participant said that lower thresholds could subject  more real estate-related transactions for which an appraisal is not  necessary to appraisal requirements. First, ASC could improve  how it assesses and reports on states’ overall compliance with Title XI. The limited rulemaking and enhanced  enforcement authorities the act provides to ASC address prior  weaknesses in its ability to promote states’ compliance with Title XI. To help address these  challenges, ASC has for the first time undertaken a strategic planning  process. Recommendations for Executive Action

To help ensure effective implementation of ASC’s Title XI and Dodd- Frank Act responsibilities and improve compliance with federal internal  control standards, we recommend that the Chairman of ASC direct the  ASC board and staff to take the following three actions:  clarify the definitions used to categorize states’ overall compliance  with Title XI and include them in ASC’s compliance review and policy  and procedures manuals, compliance review reports to states, and  annual reports to Congress; develop specific policies and procedures for monitoring the appraisal  requirements of the federal financial institutions regulators and include  them in ASC’s policy and procedures manual; and develop specific criteria for assessing whether the grant activities of  the Appraisal Foundation are Title XI-related and include these criteria  in ASC’s policy and procedures manual. FHFA and HUD did not provide comments on the draft report. In their written comments, ASC, NCUA, and OCC agreed with our  recommendations. Appendix I: Objectives, Scope, and Methodology

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) requires GAO to examine the Appraisal Subcommittee’s (ASC)  ability to carry out its functions, as well as related issues, including  regulatory exemptions to appraisal requirements, state disciplinary  actions against appraisers, and the extent to which a national appraisal  repository would benefit ASC. Our objectives were to examine (1) how  ASC is performing its functions under Title XI of the Financial Institutions  Reform, Recovery, and Enforcement Act of 1989 (FIRREA) that existed  prior to the passage of the Dodd-Frank Act, (2) ASC’s plans and actions  to implement provisions in the Dodd-Frank Act, and (3) analysis and  stakeholder views on existing dollar-based exemptions to appraisal  requirements for federally related transactions.
Why GAO Did This Study

Real estate appraisals have come under increased scrutiny in the wake of the recent mortgage crisis. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 created an oversight structure for appraisals and appraisers that involves state, federal, and private entities. This structure includes ASC, a federal agency responsible for monitoring these entities’ Title XI-related activities. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded ASC’s Title XI role and required GAO to examine ASC’s activities and exemptions to federal appraisal requirements. This report discusses (1) how ASC is carrying out its original Title XI responsibilities, (2) ASC’s actions and plans to implement Dodd-Frank Act provisions, and (3) regulatory dollar thresholds for determining when an appraisal is required. To do this work, GAO reviewed ASC records and reports, surveyed state appraiser regulatory agencies, analyzed government mortgage data, and interviewed industry stakeholders.

What GAO Found

The Appraisal Subcommittee (ASC) has been performing its monitoring role under Title XI, but several weaknesses have potentially limited its effectiveness. For example, Title XI did not originally provide ASC rulemaking and enforcement tools that could be useful in promoting state compliance. In addition, ASC has not reported or clearly defined the criteria it uses to assess states’ overall compliance levels. Title XI charges ASC with monitoring the appraisal requirements of the federal financial institutions regulators, but ASC has not defined the scope of this function—for example, by developing policies and procedures—and its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related. Not having appropriate policies and procedures is inconsistent with federal internal control standards designed to promote effectiveness and efficiency and limits the accountability and transparency of ASC’s activities.
ASC faces potential resource and planning challenges in implementing some Dodd-Frank Act provisions. ASC has only 10 staff and is funded by appraiser registration fees that totaled $2.8 million in fiscal year 2010. The Dodd-Frank Act expands ASC’s responsibilities and authorities. For example, the act requires ASC to establish a national appraiser complaint hotline and provide grants to state appraiser regulatory agencies, and it gives ASC limited rulemaking and enhanced enforcement authorities to help address prior weaknesses. As of October 2011, ASC had completed several implementation tasks that required no rulemaking or creation of new programs and was in various stages of progress on the others. The potentially resource-intensive nature of some remaining tasks will require careful planning. For example, operating a complaint hotline may require investments in information technology and the creation of screening and follow-up procedures. Also, implementing a grant program will require ASC to set aside funds, develop funding criteria, and oversee grantees. ASC is in the process of developing a strategic plan to help carry out these efforts with available resources.
GAO found that more than 70 percent of residential mortgages made from 2006 through 2009 were $250,000 or less—the regulatory threshold at or below which appraisals are not required for transactions involving federally regulated lenders. In recent years, however, the threshold has had a limited impact on the proportion of mortgages with appraisals because mortgage investors and insurers such as Fannie Mae, Freddie Mac, and the Federal Housing Administration have generally required appraisals for mortgages both above and below the threshold. While these entities currently dominate the mortgage market, federal plans to scale them back could lead to a more privatized market, and whether this market would impose similar requirements is not known. None of the appraisal industry stakeholders GAO spoke with argued for increasing the threshold. Some stakeholders said the threshold should be lowered or eliminated, citing potential benefits to risk management and consumer protection. Others noted potential downsides to lowering the threshold, such as requiring more borrowers to pay appraisal fees and requiring appraisals on more transactions for which cheaper and quicker valuation methods may be sufficient.

What GAO Recommends

To help ensure effective implementation of ASC’s original Title XI and additional Dodd-Frank Act responsibilities, ASC should clarify and report the criteria it uses to assess states’ overall compliance with Title XI and develop specific policies and procedures for its other monitoring functions. GAO provided a draft of this report to ASC and seven other agencies. ASC and two other agencies agreed with the report’s recommendations. One agency did not comment on the recommendations, and the others did not provide written comments.