Legislation regulating the appraisal industry has gone to Gov. Pat McCrory for his signature, without the language appraisers had hope would protect them from bankrupt appraisal management companies.
The legislation, HB 565, now requires certified appraisers to have a four-year college degree and reinserts a licensing level between entry-level appraisal trainees and those who are certified. Those changes and other minor tweaks to laws governing appraisers will allow the state to meet a 2015 deadline for compliance with federal standards.
Although the bill fell short of what many appraisers wanted, it did provide some financial protection for them.
The impetus for their lobbying effort was the January bankruptcy of Florida-based ES Appraisal Services, which was in debt nearly $12 million, owing about $5 million to appraisers and real estate professionals nationally, and about $240,000 in North Carolina. JPMorgan Chase & Co., which was the client for about 98 percent of ES’s business, was found by a Florida court to not be liable for the debt.
“Appraisers have been left to hold this bag,” said Joel Tate, co-chair of the governmental relations committee of the N.C. Chapter of the Appraisal Institute and co-owner of Tate & Harrell Inc. appraisers in Raleigh.
Appraisal management companies, or AMCs, act as the middlemen for banks and appraisers. Although some have been around for decades, they proliferated after federal laws were enacted in the past few years to protect consumers by providing a firewall between loan originators and appraisers, following the savings and loan scandals in the 1980s and 1990s and some questionable banking and real estate practices in the past decade.
“I’ve been in this business since 1997. In the late 1990s, there may have been six or seven appraisal management companies nationally, most of which were owned by or affiliated with major lending institutions,” said Tate. “Now there are probably hundreds.”
The companies sometimes comingle their operating funds with the money banks gave them to conduct appraisals, “and all of the sudden they find themselves overspending and not having enough money left to pay the appraisers,” said Dave Cozzarelli, owner of Apex Appraisers and president of the N.C. Real Estate Appraiser Association.
That’s why many independent appraisers wanted legislation that would prevent such companies from comingling the funds, in the form of a requirement to place appraisal fees into a separate trust account or establish an AMC-financed recovery fund.
“We need some kind of protection in this state,” Tate said. “We want to be the forerunner in this.”
Tate said that because the problems created by some appraisal management companies are so recent, only one state – Kentucky – has enacted a recovery fund.
The Real Estate Valuation Advocacy Association, a trade association for AMCs, believes that there are enough safeguards in place, said Donald Kelly, REVAA’s executive director in Washington, D.C. Following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, AMCs were required to register and be licensed.
And the legislation passed last week requires AMCs to post a $25,000 surety bond and submit to annual audits to ensure sound financial practices.
“In North Carolina, we wanted some additional consumer protection type things, as long as they make sense,” said Kelly. “We really don’t have a problem with that.”
But as far as a recovery fund goes, he said, “We thought that was overkill.”
Cozzarelli said that although “we would have loved” legislation on a trust account or recovery fund to have been passed, the formation of a study commission may help ensure “laws that are enforceable and good and really do what they are intended to do.”