The Appraiser Independence Requirements (AIR) were adopted by Fannie Mae and Freddie Mac following complaints that Optigo lenders and/or brokers exerted influence over appraisers to meet value expectations prior to engagement.
Appraiser Independence Requirements (AIR) uphold the objectivity and impartiality of appraisers by preventing coercion, undue influence, and conflicts of interest, thereby safeguarding mortgage investors, lenders, and the housing market.
Essentially, claims were made that appraisers were being persuaded in their valuations.
The purpose of AIR is to maintain independence and objectivity, reduce impartiality, mitigate evaluation risk, and establish explicit guidelines in the Fannie Mae and Freddie Mac Multifamily Seller/Servicer Guide.
It is intended to safeguard appraisers and Independent Parties when valuating one- to four-unit residential properties and maintain the integrity of the appraisal process.
Independent Parties include:
- Appraisers
- Appraisal companies
- Appraisal management companies
- Related entities
- Other parties involved in the appraisal process
This article explores the history and significance of the Appraiser Independence Requirements.
The History and Purpose of Appraiser Independence Requirements
The 2008 financial crisis played a pivotal role in shaping regulations in lending, where some of the biggest lessons came from the subprime mortgage debacle. Regulations prior to 2008 lacked basic consumer protections.
These flaws in the appraisal process, among other things, ultimately led to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included enhanced appraiser independence provisions.
Key Regulations and Guidelines for Appraiser Independence
Several regulations and guidelines established appraiser independence, beginning in 1989 with the Uniform Standards of Professional Appraisal Practice Guidelines. After the financial industry fall-out in 2008, several new consumer protections were established. In brief:
Uniform Standards of Professional Appraisal Practice (USPAP) Guidelines (1989)
The USPAP guidelines were established under the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA). USPAP guidelines generally set ethical and performance standards for appraisers.
For instance, to become an appraiser, you must take the 15-hour National USPAP course, and the 7-hour National USPAP Update course must be taken every two years.
The Appraisal Subcommittee (ASC) and Appraisal Foundation (1989)
Also established under FIRREA, the ASC and Appraisal Foundation provides federal oversight of state appraiser and appraisal management company regulatory programs. The ASC provides the monitoring framework for the Appraisal Foundation and the Federal Financial Institutions Regulatory Agencies to protect federal financial and public policy interests in the appraisal process.
Home Valuation Code of Conduct (2009)
The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac revised the Home Valuation Code of Conduct (HVCC) to expand the existing seller-servicer guidelines to ensure reliability of appraisals for loans sold to these agencies.
The updated HVCC became effective in the wake of the 2008 financial crises to ensure fair and independent property valuations for single-family homes and reduce improper influence and coercion.
The HVCC provided for the increased use of appraisal management companies as intermediaries between appraisers and lenders and increased transparency in documentation and communication between appraisers, lenders, and appraisal management companies. It set the groundwork for future appraisal practices.
The Dodd-Frank Wall Stress Reform and Consumer Protection Act (2010)
The Dodd-Frank Wall Stress Reform and Consumer Protection Act (Act) protects consumers and taxpayers from predatory lending and egregious lending practices. The Act established the Consumer Financial Protection Bureau to protect consumers against appraisal bias, required lenders to pay appraisers service fees, and codified HVCC provisions for appraiser independence.
Fannie Mae Selling Guide Updates (2023, 2024)
Recent updates reinforce appraiser independence and provide context and clarification for an unbiased appraisal process. The updates address hybrid and desktop appraisals and provide guidelines for real property appraisals conducted solely online.
Appraiser Independence Requirements
AIR protects against coercion, bribery, or influence over appraisers. It also restricts communication between appraisers and interested parties and outlines prohibited practices for lenders, real estate agents, and others involved in transactions and establishes consequences of violating appraiser independence rules.
More specifically, AIR includes eight provisions to safeguard independence, objectivity, and impartiality on the part of appraisers and Independent Parties:
- General Requirements. Appraisers must be state licensed. No person, lender, or agency is allowed to influence or attempt to influence the outcome of an appraisal using coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or any other means.
- Acceptability of Subsequent Appraisals. This provision prohibits the lender from ordering, obtaining, using, or paying for subsequent appraisals in connection with a mortgage, unless the initial appraisal was inaccurate, not credible, or violated legal or professional standards.
- Borrower Receipt of Appraisal. The lender must provide a copy of the appraisal to the buyer within three business days prior to the close of mortgage.
- Independent Party Engagement. In a single agency, mortgage production functions and appraisal functions must be completely separate. The lender is responsible for selecting, retaining, and paying the appraiser.
- Use of Appraisal Reports by In-House Appraisers or Affiliated Appraisers. Use is acceptable as long as the agency complies with AIR requirements.
- Transfer of Appraisals. Appraisals completed by an Independent Party selected by another lender can be transferred to Fannie Mae by the lender selling the loan.
- Referrals of Appraiser Misconduct Reports. It is the duty of the lender to report any misconduct by an Independent Party.
- Compliance. Lenders are required to adopt written policies, procedures, and disciplinary rules as well as implement appropriate training programs to ensure compliance with AIR.
Best Practices for Appraisers
Appraisers need to maintain meticulous documentation and reporting practices and conduct themselves in an ethical manner. It is not unlikely that during your career as an appraiser, you will be asked to inflate property values or compromise your integrity. Here are some best practices to consider:
- Establish a personal appraisal policy. Independent appraisers should have established policies so that they know what to do when faced with external pressures.
- Report undue influence or ethical concerns. Don’t wait to report unscrupulous conduct. Contact the appropriate regulatory agency.
- Stay up to date with current regulations. Most states require continuing education (CE), and a 7-hour USPAP course is mandatory. Use CE courses to stay current with new laws and regulations and industry trends.
Conclusion
If you’re acting with integrity and have a strong moral compass, you’re likely operating within the Appraiser Independence Requirements. The purpose of the AIR is to ensure fair and accurate property valuations.
Provisions provide for independence, objectivity, and impartiality on the part of appraisers and Independent Parties and set forth consequences for coercion, bribery, or external pressures against appraisers—with the risk of fines or license suspension or revocation.
The real estate appraisal industry continues to evolve and grow. McKissock’s appraisal continuing education classes are a great way to sharpen your skills and stay current with new regulations affecting the industry.
