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Advisory Opinion 10 (ao-10)

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Phil Rice

Apr 22, 2002
Professional Status
Certified Residential Appraiser
At least one person expressed interest in reading this.

My comments are made regarding Advisory Opinion 10 (AO-10), Sections 3 and 4, lines 209 thru 487. The intent of my comments is consistent with the overall objective of USPAP, i.e., to promote and maintain a high level of public trust in professional appraisal practice.

Beginning at line 238: Per FFIRA, “the appraiser shall be directly engaged by the regulated institution or its agent…”. This restriction was intended to prevent the slightest chance that an appraiser might be influenced by the borrower. (The 2nd sentence is from the AI Website, Q/A on this same issue).

I am in favor of preventing undue influence by the borrower/homeowner, but the present reality is much worse than that (i.e., the cure is worse than the disease!). Mortgage brokers, who are paid on commission, can and do exert pressure on appraisers to “hit the number”, and all too often, appraisers go along. I realize that allowing the homeowner to hire the appraiser will not completely solve the problem. However, the current rule is counter productive. It makes things worse.

The lending industry may like the rule for business reasons, i.e., it discourages homeowners from “shopping” a refinance deal. Under the current system, if a homeowner tries to switch lenders, he/she is faced with an additional $300 appraisal fee.

I ask the Appraisal Institute to focus on the objective, which is to promote and maintain a high level of public trust in professional appraisal practice. The existing rule causes material damage to the level of public trust in professional appraisal practice. The FFIRA rule which states that “the appraiser shall be directly engaged by the regulated institution or its agent” should be eliminated. A homeowner should be allowed to directly engage an appraiser, and use that appraisal to refinance their mortgage (or buy a house).

I realize that my suggestion is unlikely to be implemented any time soon. Given that, my comment is:

Until the bad FFIRA rule can be eliminated, I have no problem with the notion that appraisers should disclose the rule to a homeowner before accepting an assignment.

Additional Comments:

Beginning at line 310, you state that “the reason the requestor wants to be identified as the client and does not use the appraisal report completed for another financial institution or client, is to establish its own appraiser-client relationship and obtain all the rights and obligations that relationship provides”.

I wish to challenge this statement. Based on my experience, when a lender asks to have the appraisal put in their own name, it is because some low level paper pusher is blindly following a real or perceived company policy. They could care less about an appraiser-client relationship. The company policy exists because of the bad FFIRA rule quoted above in issue #1.

At line 314 you state “such a relationship cannot be established after the assignment is completed”. The statement at line 314 is misleading. It should be modified by adding a second sentence, as follows:

Such a relationship cannot be established after the assignment is completed. However, it is acceptable for an appraiser to treat the request as a new assignment, i.e., a request to appraise the same property for a new client, which is explained in the next section.

Lines 320 – 329 look good.

Lines 330—409, I agree that there is much disagreement among appraisers about how USPAP applies to these issues. Clarification on this issue is needed. You do a good job of identifying what the issues are.

Lines 410 - -487: I agree with your rationale and your conclusions.

Terry Russell

Senior Member
Feb 24, 2002
Professional Status
Appraiser Trainee

It is not that others are uninterested. It is likely more due to the fact that this topic has been heavily discussed in recent months. You may be able to find archived posts on this topic. With the new forum format, I am not positive on that.

George Hatch

Elite Member
Gold Supporting Member
Jan 15, 2002
Professional Status
Certified General Appraiser

In reference to the origin of the 'bad rule'.....

“the appraiser shall be directly engaged by the regulated institution or its agent…”.

The lenders didn't want this rule, it was imposed on them as a condition of the S&L bailout. The thinking behind this has nothing to do with locking a borrower into a single lender during a loan process. Besides, if a lender is offering a no-cost (upfront) loan fees to include appraisal services, the borrower isn't locked into anything until they sign loan docs.

No, the real reasoning is to prevent a borrower from 'buying' a pet appraiser to get the desired number and then shotgunning the package all over town to find a wall where it would stick. It's really not even the happy homeowner the feds are worried about; it's the high dollar developers who in fact did buy pet appraisers or even employ them on staff to develop appraisals for loan packages.

The intent of this rule is to hold the lenders accountable for the appraisals they make loans on, which is why approval lists, accept lists and do-not-accept lists still determine who a bank will take appraisals from.

Now as to why appraisers are still being illegally pressured to make value, a fact that nobody will argue with or deny, I think the origin is in the add-on clause in that rule that does in fact benefit the financial industry:

“the appraiser shall be directly engaged by the regulated institution or its agent…”.

It's the commission compensated loan originators, whether they are a mortgage broker, loan officer or subordinate, who have a vested and conflicting interest in placing the loan with the regulated lender, that complicates things for us. The intent of this rule was to place appraisal engagement in the hands of those being held accountable (by the feds) for the appraisal. Instead, the "or its agent" has managed to insert themselves into what was supposed to be a fiduciary relationship between the appraiser and the lender whose money is going out the door. This is the source of most of the pressure appraisers get.

If you've ever worked on staff for a lending institution (no, Fly-By-Night Mortgage, incorporated in the Bahamas doesn't count), you know that banks and thrifts are actually very concerned with the integrity of the process. That's because if a bad appraisal is found on their books they are subject to immediate discipline, especially if the situation is found to be chronic. Some of these institutions are wary enough of this liability that they actually use the broker system specifically to avoid the responsibility, often in a look-the-other-way fashion that is intended to instill some plausible deniability into these practices.

In summary, the intent of the rule is good, but the loophole that is written into it is big enough to drive the entire industry through. Which is exactly what is happening. I would say that a simple rewording of the rule to eliminate the loophole would make everyone's life easier, except possibly the mortgage brokers.

George Hatch
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