July 29, 2013 – Post No. 23 – Over the past few months I have been studying to take a German appraisal exam – thankfully, given in English:) For those American appraisers who complain about the cost of annual dues for various organizations or continuing ed seminars or license renewal fees, note that it cost $6,000+ for me to just take the 4-hour exam last Friday. The requisite classes each cost more than that. It’s cheap, and easy, to become an appraiser in the USA.
In studying for the exam, I came across the German philosophy on appraiser independence. Similar requirements they have to some statements in our USPAP Certification are the appraiser must have no relation to the borrower, not have a financial interest in the subject property, and so on. This area of independence is very comparable between the two countries.
The more unique requirement for independence applies to valuers who work as bank employees. Principle of functional separation is reflected in organizational integration in one of the following three ways:
1. The valuers are directly subordinated to the management board;
2. They are exclusively part of a valuation unit which is directly subordinated to the management board;
3. All valuers are consolidated in one unit and allocated to one area of the bank, such as back office which is directly under the management board.
In addition, the management board must write a letter stating the valuers are independent and the management board takes responsibility for such independence AND this letter must be included in every in-house appraisal prepared by the staff valuers!
Yes, FIRREA states that staff appraisers (albeit most are reviewers only) must be independent of the loan and collection functions of a bank. However, I doubt there is a staff appraiser in the USA who would deny being under heavy pressure and influence from the lending side. It is one thing to write it in a law, it is another to make sure it is occurring in the real world. Both fee and staff appraisers in the USA can vouch that laws have not made their function totally independent from extreme influence from biased parties.
So the question is, would placing ALL bank appraisal functions directly under the Board of Directors and have the BOD held personally responsible for appraiser independence improve the American situation? I leave that to the appraisal industry and bank enforcement agencies to consider.
I have heard another solution is to move the bank appraiser staff over to a government agency – i.e. the appraisers and reviewers are government employees and thus beyond the reach and influence of lenders.
Either scenario should greatly reduce the influence that has been occurring every since FIRREA came out in 1990. Granted, not many banks use staff appraisers to prepare appraisals. But, placing employees who order and review appraisals directly under the Board of Directors would seem to be a significant step in the right direction.
I can hear some of you saying well how about just reporting to the CEO. Well, you know my stance on Jamie Dimon and thus I don’t think the CEO is high enough to guaranty independence. Only putting the Board of Directors personally responsible can make this work.
My grassroots campaign is to get laws changed in every state to allow licensed appraisers to perform non-USPAP Evaluations. So far, Georgia and Tennessee have passed such laws – only 48 more to go:) So I will leave the above independence ideas to the appraisal community, appraisal organizations, federal agencies, and Joan Trice’s Collateral Risk Network that seems to do well promoting new concepts. Only so many battles any of us can fight at any one time.
As always, you can email your thoughts to me at GMann@ces-wm.com
Happy National Lasagna Day, (Garfield would be happy!)
George R. Mann, CRE, FRICS, MAI
Managing Director
Collateral Evaluation Services, LLC