Memo to KY AMCs

Memorandum to Kentucky Registered AMCs Regarding Appraiser Independence, Objectivity, and Impartiality

From: Larry Disney, To: Kentucky Registered Appraisal Management Companies and Credentialed Appraisers, Date: March 29, 2012

Subject: Appraiser Independence, Objectivity, and Impartiality

The Kentucky Real Estate Appraisers Board staff has received calls from Kentucky credentialed appraisers in the past two weeks concerning the following issue that is being propagated by Appraisal Management Companies:

When appraising one unit residential properties and reporting the results of the appraisal development using a 1004 Fannie Mae form, the appraisers are told that if the cost approach is developed and reported, regardless of reasoning, the appraiser shall not consider the opinion of value developed via the cost approach when reconciling the final opinion of market value.

The appraisers tell the staff they have been instructed to insert “only” the value opinion developed in the sales comparison approach within each of the following 1004 form fields, 1) page 2 of 6, value indicated by the sales comparison approach, 2) page 2 of 6, the reconciled opinion of market value at the bottom of the page 2, and 3) the bottom of page 6 of 6.

For your information, USPAP requires that only the appraiser shall identify the scope of work. If the appraiser determines that the cost approach is applicable for developing a credible opinion of value, the above instruction clearly contradicts the following requirements within the 2012-2013 edition of the Uniform Standards of Professional Appraisal Practice (USPAP).

Ethics Rule, page U-7
“Conduct – An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.”

Scope of Work Rule, page U-13
“An appraiser must properly identify the problem to be solved in order to determine the appropriate scope of work. The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results.”

Scope of Work Acceptability, page U-14
“The scope of work must include the research and analyses that are necessary to develop credible assignment results. Comment – An appraiser must be prepared to support the decision to exclude any investigation, information, method, technique that would appear relevant to the client, another intended user, or the appraiser’s peers.”

“An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.”

Standards Rule 1-2(4)
“In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.”

The above rule requires that the appraiser must develop any one or all of the approaches to value that he or she believes to be applicable for purposes of developing credible assignment results. The following FAQ 147, page F-68 within the 2012-2013 USPAP edition clarifies that it is the appraiser who has the total responsibility for making the decision of the relevance and applicability for each approach to value developed. That decision shall not be made by the client or an agent of the client.

“FAQ 147 – Responsibility for the Scope of Work Decision
Question: Who determines the scope of work?
Response: It is the appraiser’s responsibility to determine and perform the appropriate scope of work.”

The following rule (a) requires that the appraiser must reconcile a value opinion for each approach to value developed while rule (b) requires the appraiser to reconcile a final value opinion based upon the weighted relevance of each value opinion(s) developed.

Standards Rule 1-6
“In developing a real property appraisal, an appraiser must:

(a) reconcile the quality and quantify of data available and analyzed within the approaches used; and
(b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s).”

Requiring an appraiser to ignore any value opinion he or she develops and reports is tantamount to prohibiting the appraiser’s ability to be independent, objective and impartial.

Standards Rule 2-2(b)(viii), page U-26, Summary Appraisal Report requires the appraiser to “summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost approach, or income approach must be explained.

The above standards rule also includes a comment on page U-27 that “The appraiser must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions, including reconciliation of the data and approaches, in accordance with Standards Rule 1-6.” Standards Rule 2-3, page U-29, includes a requirement that “Each written real property appraisal report must contain a signed certification that is similar in content to the following form:”

• The statements of fact contained in this report are true and correct.
• The reported analyses, opinion and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions.
• My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

Please be advised that if a Kentucky registered Appraisal Management Company requires a Kentucky credentialed real property appraiser to ignore any approach to value, the request could be considered a violation of the following Kentucky Revised Statute language:

KRS 324A.158 Prohibitions against certain conduct by registrants

“(1) An employee, director, officer, or agent of an appraisal management company or any other third party acting as a joint venture partner with or as an independent contractor for an appraisal management company shall not improperly influence or attempt to improperly influence the development, reporting, result, or review of a real estate appraisal, including but not limited to the use of intimidation, coercion, extortion, bribery, blackmail, threat of nonpayment or withholding payment for appraisal services, or threat of exclusion from future appraisal work.”
“(2) The registrant shall not:

(d) Remove an appraiser from an appraiser panel without prior written notice to the appraiser. An appraiser may only be removed from an appraiser panel with written notice for:

1. A violation of the minimum USPAP standards or other applicable statutes or administrative regulations resulting in a suspension or revocation of the appraiser’s license in Kentucky; or
2. Other substandard or otherwise improper performance as may be determined by administrative regulations promulgated by the board;

(h) Commit an act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality;”

Regardless of a client request, Kentucky credentialed appraisers who fail to comply with USPAP could also face disciplinary action by the Board.

The Board and staff of the KREAB desire to assist all Appraisal Management Companies with providing the best management services possible to lender clients, while providing professional and meaningful assistance to Kentucky credentialed real property appraisers, and consumers throughout the Commonwealth of Kentucky.

In order to assist in achieving the above objective, it is the opinion of the Board that Kentucky credentialed appraisers must be allowed to develop the appropriate scope of work which includes the development of any approach(s) to value considered applicable by the appraiser, and the appraiser shall report a credible reconciled opinion of value for each approach developed and the final opinion of value.

If additional information about this topic is required, please contact Larry Disney at the Board office.

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