Report finds banks returning to lax appraisal policies.

Professional appraisers warned the Clinton Administration last year not to change regulations for lending institutions that could place them in position to repeat the wholesale failures of the 1980s. However, a March, '95 report sent to Congress by the Office of the Inspector General for the Federal Reserve System has found 24 serious appraisal deficiencies in 89 commercial loans studied; and two out of three teams of federal examiners failed to detect these problems.

Specifically, "undetected deficiencies included appraisals that: were not obtained when needed for loan renewal transactions; were ordered by the borrower instead of the commercial bank; were received or critiqued after the loan already closed; or did not meet professional appraisal standards."

The IG also reported that in some banks, loan officers involved in making loans were permitted to critique appraisals, establishing the adequacy of collateral for those loans.

The Inspector General's report, delivered to The Honorable John P. LaWare, chairman, Committee on Banking Supervision and Regulation, links these failures to similar reports following the bank failures in the 1980s. Further, the Fed's inspectors claimed their findings "are consistent with our January 1995 Report on the Failure of Pioneer Bank, which also indicated that examiners were not detecting appraisal violations."

Commenting on the Inspector General's report, Max G. Kooper, ASA, International President of the American Society of Appraisers said, "One can only conclude that those who set policy in our banking and regulatory systems learned little or nothing from those failures. Congress should be justifiably perplexed by the Inspector General's report. They thought they had remedied the problems of the 1980s with the passage of FIRREA."

FIRREA is the Financial Institutions Reform, Recovery and Enforcement Act of 1989, under Title XI of federal law. Along with those reforms, the act allowed the creation of the Uniform Standards of Professional Appraisal Practice (USPAP) to be utilized by all appraisers.

However, according to Koeper, "Administration officials began soon after Mr. Clinton's election to effect a back door repeal of Title XI by encouraging the federal regulating agencies to change what's called the `de minimis' from a low $15,000 to $250,000 - all in a short span of 18 months."

Changing the de minimis means appraisals by state licensed and certified appraisers no longer are required for federally related financial transactions under $250,000 or for small business loans of less than $1 million where income from the real estate collateral is not the primary source of repayment. As Koeper and others in the appraisal profession see it, the net effect of these changes is to revert to the way things were in the 1980s.

"Federal regulators, in over 90 percent of all residential home lending transactions, are now denying consumers the protection of detailed appraisals required by Title XI," Koeper said. "Ultimately, consumers paid for the failures of the 1980s and it appears that history is already repeating itself."

How can consumers protect themselves? Koeper advises, "Consumers should write to their elected representatives demanding: a reversal of the dangerous path federal regulators are taking; the protection of appraisals made by state licensed or certified appraisers when purchasing homes or making small business loans; and a requirement that appraisers in such transactions possess credible credentials and a track record that includes strict adherence to the Uniform Standards of Professional Appraisal Practice."