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Do we need a statewide appraisal peer review system?

The appraisal literature is replete with articles discussing appraiser certification, ethics, standards, review practices, legal liability, and client relationships. The professional life of an appraiser has never been more fraught with intense regulations, immersed in liability entanglements, or accountable to its constituencies.

In spite of the many requirements that were thrust into appraisers' business affairs by professional appraisal organizations, the federal government, and the state regulatory commissions, no informal and confidential means are available to adjudicate client or peer complaints involving violations of the Uniform Standards of Professional Appraisal Practice (USPAP). No procedure exists for either self-regulating or self-policing the professional activities of appraisers.

This article argues the case for implementation of a uniform statewide system of peer review grievance processes to investigate complaints that arise from alleged violations of the USPAP. Such a review process should begin at the local level. Conceptually, the process would parallel the peer review procedures already being used by medical doctors, attorneys, accountants, Realtors, and many other professionals.

What power do peer reviewers have? The authority vested in other professions' peer review processes varies. Efforts range from calling informal meetings between the alleged offender and key members of the review committee to revoking the offender's license to practice in his or her state.

This article first examines the question: How would an appraiser peer review organization work? Then it characterizes, from a historical perspective, the current structure of professional appraiser organizations. This will shed light on the reasons a peer review organization--if one is deemed necessary--might be slow to emerge from the existing yet fragmented structures.


Is a peer review process really needed within the appraisal profession? No additional organization would need to be created to handle USPAP enforcement or education because these activities are currently undertaken by existing organizations. All monitoring and enforcement authority falls to the state regulatory commission that grants appraiser certification or to the courts. For example, in the event an appraiser is in flagrant violation of appraisal standards or grossly negligent in his or her duties, the state commissioner, operating under authority vested by state certification powers, will convene an administrative body to adjudicate the allegations. In an extreme instance when an appraiser's gross errors result in a client's monetary loss sufficient enough to warrant legal action, the courts will render the judgment and determine what damages are due to the client. Whether a state's staff can act promptly on individual allegations of impropriety is debatable.(1)

Eventually all matters taken before commission or legal bodies become part of the public record. This leads to two questions: Are these types of state-directed remedies in the best interests of the appraisal profession? Are there instances when an appraiser's transgression of USPAP rules might be better handled locally and confidentially?

Of course, the system that utilizes both state commissions and the courts is sufficient for imposing sanctions on appraisers (or on any of the other professions that operate a peer review process), and it appears to be efficient as well. When an appraiser becomes a "bad apple" by ignoring the USPAP, a commissioner's office initiates appropriate action.

Nevertheless, the aforementioned professions with established peer reviews saw a need to organize and implement a peer review process in conjunction with their states' licensing commissions and under careful scrutiny of attorneys always eager to use the courts for the benefit of their clients' interests.


A peer review committee is the body that initiates investigative action against a professional who violates the peers' code of standards or ethics. A peer review begins at the local level and makes recommendations to the appropriate state commission if further action is deemed necessary.

What kinds of problems do peer reviewers consider? This question can be answered by looking at some actual incidents the author encountered while serving as a lay member (non-attorney) of the Toledo Bar Association Grievance Committee. The committee is composed of 25 members. (As of February 4, 1992, an Ohio State Supreme Court ruling requires that three be non-lawyers.) The committee serves as a first-level peer review group and is similar to others that operate in each city or district in the state, commissioned by local bar associations. The authority of the committee is limited to dealing with violations of the Code of Professional Responsibility, which covers all attorneys admitted to the Ohio Bar Association who practice law in the state of Ohio. Specifically, Article IX authorizes the committee to "investigate allegations of misconduct by attorneys and mental illness affecting attorneys, and the initiation of complaints as a result of these conditions."(2)

At its closed monthly meetings, the committee mainly considers complaints submitted in writing from a client or another attorney. Client allegations range from being treated disrespectfully when cross-examined in court to being overcharged for services rendered to commingling of the attorney's and client's funds. Allegations by other attorneys are relatively rare. On average, 8 to 10 client complaints are received each month. About 80% clearly do not amount to a violation of the code and are therefore dismissed by the committee. The complainant is so notified.

When there is reason to believe a violation occurred, an investigating subcommittee consisting of two committee members is appointed to interview both parties to the allegation. The investigating team is required to report its findings to the entire committee at the next scheduled meeting. In the event an attorney refuses to cooperate with the investigating committee, the team can recommend a subpoena action.

After listening to the investigating committee's report and recommendation, the entire committee discusses the findings, adds insight, and votes to either dismiss or convene a probable cause heating and panel. At a probable cause hearing, the attorney can be represented by his or her own attorney. The investigating committee chairperson serves as the prosecutor and a court reporter records all statements made. If a committee member has any involvement with the case or the person under investigation, he or she is obligated to leave the room during these proceedings.

Once the facts pertaining to the case are presented in full, the accused attorney leaves the room and the entire committee debates the merits of the case, discusses appropriate disciplinary action, and votes on whether they believe the attorney violated a specific item of the code. Regardless of the outcome of the vote, either party to the complaint is given the right of a hearing before the local bar association's disciplinary counsel (a review finding), which is a committee separate from the grievance committee. A review finding by the disciplinary counsel is required in cases when the grievance committee finds no probable cause (i.e., dismisses the charges filed by the complainant). Cases suggesting probable cause are forwarded with all records to the Board of Commissions of the Ohio Supreme Court, which renders its own decisions. Decisions can range from a temporary to a permanent loss of the license to practice law in the state. Normally, the state hearings do not result in dismissal of the complaint. The state-level hearings permit the rights of due process of the accused, but once the case is sent to the state level it becomes public and typically receives media attention. Reckless accusations can destroy professional reputations; legitimate accusations can rein in reckless professionals.

The grievance committee is charged with the responsibility of treating all parties in a fair and humane manner. In one case, a client complained that his attorney's breath smelled of alcohol. Other committee members observed they too had noticed alcohol on the attorney's breath at prior business interactions. Even though the attorney had every right to consume alcohol (and even to become an alcoholic), the fact that he appeared before the client in an intoxicated condition mandated the committee do something. They voted to send his file to the local substance abuse committee for action. Although that committee had no legal authority to enforce compliance, it could have met with and counseled the individual. If the individual ignored all suggestions to control his alcohol consumption and a subsequent complaint was received, the committee could have recommended that the case be sent to the state level. The committee considered the trouble that alcohol and substance abuse can bring to an attorney and his or her family, and tried to find a solution that met the underlying goals: to treat individuals in a manner that will enable them to practice law the best that they can and to avoid future complaints from clients.

A second case involved a sole practitioner who did not return phone calls from clients, did not pay out insurance settlements promptly, and seemed very disorganized, according to complaints from several clients. After discussing the investigating team's report, the committee recommended that two senior attorneys meet with this individual to advise him on specific matters on how to better organize his business affairs. The senior members advised the younger attorney to enroll in workshops on law office management. New attorneys who practice alone are most likely to fall victim to this problem because, as one committee member noted, "Law school doesn't prepare you to run your own office." Larger law firms employ office managers who ensure the business affairs of the law practice are functioning properly, and they have senior partners who counsel new law school 0graduates.

For first offenses that involve minor infractions of the code, such as swearing at a client, the committee can choose to keep action local and confidential by recommending that the attorney's file be kept in a "coloration" status for two years. This incident documentation action calls for the imposition of more severe sanctions in the event the attorney repeats the offense during the probationary two years. The accused attorney is warned, and he or she is then counseled by a senior member of the committee. The spirit of these encounters, according to one veteran attorney, is to put the offending attorney on notice that his or her actions are being monitored, and, when appropriate, help overcome procedural problems in practice management.

More serious offenses, such as the commingling of funds or a conflict of attorney-client interests, require sanctions. When commingling of funds is suspected, the accused attorney must furnish the bank records of his or her escrow account. If the balance in the account falls below the total amount of the clients' escrow funds, there would be clear reason to charge the attorney with commingling of funds.


The appraisal profession is currently engaged in a type of peer review called the review appraisal, as set forth under Standard 3 of the USPAP. Doesn't this in-house review appraisal process, which is performed by a senior appraiser, provide the same outcomes as the peer review? The answer is yes and no. The review appraisal can occur either within a firm by an appraiser's colleague or supervisor, or through an experienced outside appraiser hired by the user or client. According to the USPAP the reviewer assumes complete responsibility for the details of the appraisal once he or she signs it. An in-house or colleague review appraisal may achieve a considerable amount of good by upgrading appraisal work of a junior member or a less experienced colleague. But Standard 3 only covers the work product and not the conduct of the appraiser.

An external review appraiser, typically employed by the user of the appraisal, can request more information for improperly completed appraisals. Upon completion of the review, however, the reviewer will likely advise the employing agency or institution whether to continue hiring the appraiser who was reviewed. In the event the review indicated notable deficiencies, there is little likelihood of further employment or disciplinary action. The offending appraiser is left to continue searching for valuation work, perhaps unknowing or unconcerned about the inadequacy of his or her appraisal standards.

The appraisal profession, the client, and society would be better served if the review appraiser could confidentially send a concern or complaint to a local peer review group. The group could investigate the allegation, and work with the accused appraiser to avoid more severe problems, if circumstances surrounding the complaint merit further action. Authority to place sanctions on those found guilty would be vested by state legislation.


One of the biggest decisions to be made with regard to any peer review process is the designation of peer group members. Any appraiser peer review group should consist of at least 15 members. The majority should be made up of appraisers; the remainder should include representatives from major constituency groups, including lenders, real estate brokers, real estate lawyers, and real estate professors.

A diversity of peers within the group provides two important benefits. First it offers the people who use appraisals an opportunity to view complaints and react to them, either by offering insights to an appraiser on how to regain standards compliance or by restricting his or her actions with the recommendation that the appraiser's license be revoked for a specified time period (assuming the group has the authority to do so). Due process would dictate that the latter action lead to a formal hearing before the state license commission.

Second, a wide representation of review membership assures the public that the profession is serious about dealing with potential problems. It suggests that reasonable and reliable safeguards exist to prevent an appraiser from becoming the center of some future controversy regarding inaccurate or fraudulent appraisals. Historically, peer review committees comprised solely of professional colleagues of the accused have aroused suspicion. Critics persuasively argue that clients' complaints are often dismissed in order to protect members of the fraternity. Outside representation may lead to fewer instances of corruption and more balanced input in discussions about allegations of wrongdoing. As mentioned earlier, attorney peer review groups are now requiring the presence of members who are not attorneys.


Equal in importance to the individual membership of a peer review group is the organizational structure behind it; this structure must provide a solid framework within which complaints can be submitted and investigated.

Currently, the largest professional appraiser organizations are posturing to seize the leadership role in developing and enforcing standards. The Appraisal Institute(3) mandates its membership to follow its code of ethics as a condition of membership. Unfortunately, a member can resign his or her membership, though not during an investigation of an ethics code violation. The Appraisal Institute's authority to regulate the appraisal profession is hampered by the fact that a relatively small percentage of all appraisers are members.

Whether they choose the Appraisal Institute or another of the leading professional appraiser organizations,(4) a primary reason individuals join such groups is the receipt of a recognized professional designation or certificate. A designation suggests that an appraiser is interested in improving his or her education and therefore is more competent than someone who is not a member. Service providers have long understood the importance of prominently displaying their licenses, professional certificates, and college degrees as a means of gaining credibility (and a marketing advantage.) It assures prospective clients that a professional is competent. But not all designations are equal, and rivalry between the organizations that grant designations has sometimes been heated.

The goal to educate appraisers was particularly laudatory in the years preceding 1991, when mandated statewide appraiser certification requirements did not exist.(5) At that time, the education and experience requirements to enter the appraisal profession were minimal or nonexistent, depending on the state in which the appraiser resided. Unfortunately, the quality of educational offerings was not consistent.

On the heels of the savings and loan crisis, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This legislation placed part of the blame for the crisis on the shoulders of the real estate appraisal profession for "cooking the numbers" to assure uninterrupted transaction activity, regardless of underlying collateral value. The threat of federal regulation of appraisers became clearly visible on the horizon. The fractious professional appraiser organizations saw a need to quickly unite and deflect the impending threat.

This reaction led to The Appraisal Foundation, a confederation of eight professional U.S. appraiser organizations, founded in 1987 as a non-profit educational corporation. This belated, hasty effort demonstrated to Congress and other critics that appraisers could self-regulate and foster professionalism by promoting the USPAP and by helping to ensure that appraisers are qualified to offer their services. Today The Appraisal Foundation is supported by 18 organizations representing appraisers and those who use appraisals.(6)

The large number of overlapping professional appraiser organizations was, perhaps, useful in the precertification years. But many appraisers now recognize that a shakeout between their organizations is inevitable. The relatively small pool of appraiser members and potential members is being divided between too many organizations to obtain a critical mass of authority in membership numbers. The financial stability of some or all may be at stake. To illustrate the heightened anxiety: A lawsuit was filed recently by the National Association of Review Appraisers, Mortgage Underwriters, Inc., and the National Association of Real Estate Appraisers naming The Appraisal Foundation and its 10 members as co-defendants. The suit claims the defendants hold monopoly control over the plaintiffs' desire to gain membership in the foundation and are conspiring to prevent their entry. The defendants counterclaimed, charging that some organizations do not uphold sufficiently rigorous appraiser standards to merit membership.

In the wake of dissipated energies from the fraternal infighting, the National Association of Realtors (NAR) in 1990 seized the opportunity to launch its Appraiser Section.(7) NAR is using its considerable resources to market membership enthusiastically. NAR intends to become the leading professional appraiser organization. In addition to challenging the Appraisal Institute's reputable and rigorous educational courses and certification, NAR is purportedly evaluating a plan to offer its own appraiser designations. Aside from the obvious increase in membership, the creation of the Appraisal Section benefits NAR by bringing together its 800,000 real estate sales and brokerage membership under the same organizational umbrella with the appraisers.

The sometimes stormy and contemptuous interactions between real estate sales professionals and appraisers (who are occasionally accused of killing pending sales contracts with low appraisals) will make the two groups interesting bedfellows. Whether the public interest will be best served from this close association between two professions that are independent in the transaction process remains an open issue. This question will no doubt be aggressively debated by one or more of the established appraisal organizations whose existence may be jeopardized by NAR's growing membership rolls.

Tracking the current events among the various appraisal organizations serves to make the point that, at this time, none of them is positioned with strong national membership representation, vast financial resources, or industry consensus that would be needed to lead a state-by-state peer review organization.


If the existing appraisal organizations would be unable to assume responsibility for a massive appraisal peer review task, who will do it? This is a thorny question. Under the rules of the USPAP, all appraisers earning state certification must abide by USPAP rules. An appraiser who chooses not to become state certified can, however, circumvent USPAP rules. But lending institutions must use certified appraisers only when the lender sells the loan in the secondary markets (even though the Federal National Mortgage Association and others are still requiring licensed or certified appraisers). It is actual practice to use uncertified appraisers for some agricultural real estate loans, very large residential loans, and some commercial real estate loans held in a lender's portfolio until maturity, early pay-off, or refinancing. In rural areas, uncertified agricultural appraisers can conduct business for many years. A deficient uncertified appraiser can continue an appraisal business outside the reach of peer review and the USPAP.

To be effective, all those engaged in value estimation activities construed as appraising should be bound by the state peer review policies. But the current lack of legislated enforcement or sanctions for USPAP violations eliminates a quick and easy administrative implementation.

As discussed in the previous section, the many professional appraiser organizations have fragmented the appraisal profession, making it very different from law or medicine, which are bound by their respective bar associations or medical societies. The peer review groups are organized around individual population centers--either a county or, in rural areas, clusters of counties. Appraiser peer review could be organized jurisdictionally in a similar manner.

Benefits and drawbacks of existing organizations

A review of the structures of the leading appraisal groups may offer insights into the question of whether a logical peer review leader can emerge from the existing organizations. The Appraisal Institute is organized statewide by county or county clusters. The organization's scope, membership base, and longstanding reputation make it an attractive possibility for the basis of a peer review structure. A disadvantage, however, lies in the group's traditional exclusiveness; the letter and spirit of its bylaws do not permit open membership.

The Appraisal Foundation could also function as the base for a peer review structure. The organization appears to have successfully consolidated eight diverse, independent appraiser groups to work with the government on the certification task. For purposes of peer review, however, the eight independent organizations should be folded into one unit, which could prove politically difficult. Differences in the organizations' membership reciprocity, membership clustering, and membership interests and operating philosophies would be very difficult to reconcile if separate identities were maintained. If it could favorably resolve the competing identities of its individual member organizations, The Appraisal Foundation would at this time be the best positioned organizationally to sponsor and administer a statewide peer review function. Whether The Appraisal Foundation could internally resolve the potential question of which of its associate organizations would emerge as the leader would determine the success of implementing a viable and legitimate peer review organization.

Another organization that could play a part in establishing a peer review system is NAR, which offers the distinct advantage of an established network of offices in all states throughout the nation. Although its appraiser association is relatively new and at this time lacks rigorous standards for membership, the main organization is well established and has substantial name recognition with the public. Clearly, for the purposes of holding peer review meetings and keeping related records, the availability of local offices would provide both security for records and files and an experienced and permanent staff. The precedent set by the existence of a Realtor peer review system would facilitate local staff training in appraisal record keeping and confidentiality. Having established local meeting locations would give the organization a significant advantage over those professional groups that hold their meetings in restaurants with volunteer officers and staff. The confidential nature of peer review meetings would eliminate the use of a room at the local Holiday Inn or restaurant for peer review hearings. Similarly, it would be inappropriate to store confidential peer review files and records in the home or office of the local chapter secretary.


An appraisal grievance process, in conjunction with a local peer review mechanism, is a quality control check that can be used to interdict "minor" USPAP infractions at an early stage, curbing small problems before they have a chance to develop into larger ones that cause considerable damage on a personal or public level. The intensely competitive markets in which most appraisers operate can foster either socially desirable or undesirable behavior. For example, assume one or two appraisers begin making inaccurate or fraudulent appraisals for unethical (or unknowing) clients. Assume further that the appraisers' behavior continues unchecked and without sanction. Without a legitimate mechanism to formally address this type of behavior at an early stage, pressure may be placed on other appraisers to behave in a similar manner in order to attract or hold business. This can ultimately lead to rampant moral erosion in the profession. A "Why not? Everybody does it" attitude could eventually dominate. This type of ethically relativistic behavior on the part of appraisers culminated with the savings and loan crisis. As professionals, appraisers must learn from past mistakes and not repeat them.

Can we argue persuasively for peer review for appraisers? The author believes the peer review process works, in large part based on experience gleaned from working with attorneys on the issue. Many aspects of the attorney peer review process, as well as other peer review models, could be adapted for use by appraisers.

Once a leading professional appraiser organization is identified and assumes a consensus leadership role, the functional mechanics of peer review could emerge. Clearly, a permanent support staff and secure meeting locations are necessary to conduct confidential peer review hearings. Without an adequate local infrastructure, a peer review process would be most appropriately operated out of each state commissioner's office. This, however, would not operate as effectively as the locally based attorneys' or physicians' peer reviews.

Appraisers must aggressively accept responsibility for locally monitoring the ethical and procedural affairs of individual members of the profession. A broad-based peer review committee comprised of both conscientious appraisers and knowledgeable appraisal users could greatly allay public concerns that the appraiser fraternity continues to overlook the transgressions of its fellow members. Identifying and correcting USPAP violations at the local level before "minor incidents'' suddenly reach scandalous proportions will favorably serve the future of the appraisal profession, users of appraisals, and, more generally, society at large. A carefully monitored appraisal profession faithfully serves the public interest and, at the same time, enhances its own credibility and integrity.

1. Unfortunately, the additional staff the state would need to investigate and adjudicate the potential complaints regarding some of the 4,000 appraisers expected to be certified in Ohio would create a formidable obstacle. Other states could expect similar administrative burdens.

2. Code of Professional Responsibility, Toledo Bar Association, 384.

3. The Appraisal Institute is the organization that resulted from the 1990 merger of two of the oldest and most professionally oriented of all appraiser organizations, the Society of Real Estate Appraisers (SREA) and the American Institute of Real Estate Appraisers (AIREA).

4. The leading U.S. professional appraiser organizations are the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, the International Association of Assessing Officers, the International Right of Way Association, the National Association of Independent Fee Appraisers, the National Association of Real Estate Appraisers, and the Appraisal Institute.

5. Statewide appraiser licensure and/or certification ultimately became effective January 1, 1992.

6. David S. Bunton, "The Appraisal Foundation Position on the Antitrust Litigation," Real Estate Valuation Magazine (Winter 1993): 43-44.

7. For nearly 60 years, the National Association of Realtor's (NAR's) appraiser unit was AIREA. However, NAR was criticized for failing to provide adequate support for its appraiser members. Consequently, most NAR appraisers found it necessary to seek membership in other, more responsive, appraiser organizations. AIREA voted to disaffiliate from NAR and consolidate with SREA (see footnote 3). In the aftermath of the unsettled times leading to the regulation of appraisers, NAR saw an imperative to re-establish service to appraisers by creating the Appraiser Section. The nature of their membership recruiting literature suggests a serious effort to become preeminent.

Gerald E. Smolen, PhD, is a professor of real estate and banking at the University of Toledo in Ohio. He was department chairman for five years, and is now the director of the university's Real Estate and Financial Markets Research Institute. Mr. Smolen recently completed a sabbatical leave on which he studied the forces promoting or inhibiting economic development in northwest Ohio. He is a certified general appraiser in Ohio and has published extensively in real estate, banking, and corporate finance journals.
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Author:Smolen, Gerald E.
Publication:Appraisal Journal
Date:Jan 1, 1994
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