Regulatory Compliance in Business: The Key to Longevity in a Regulated Industry

Transcript

Speaker 1: 0:01

This podcast is for educational purposes only, does not constitute legal advice and does not create an attorney-client relationship. If you need legal assistance about a legal problem contact an attorney. Welcome to another episode of Know your Regulator, the podcast that inspires you to engage. I am your host, Simone Murphree, and co-hosting with me today is Troy Bullier, Director of Legal Services at Bertolino Law Firm.

Speaker 2: 0:27

Thanks, simone. Today we have a special episode. We’re going to be talking about regulatory compliance for businesses and the important impact that has on smooth, successful and efficient business operations. Whether it’s owning your own business or managing a team, that’s part of the business, or maybe perhaps you’re just a professional license holder and you’re operating your own practice as a small business a sole proprietorship you really need to have an understanding of and appreciation for, you know, integrating regulatory requirements into your business operations. That’s going to be essential for long-term success and risk management.

Speaker 1: 1:13

That is very right, troy, and to help us unpack these critical issues, we’re very excited to welcome Douglas Reeves, president of Appraisal Shop. Doug operates the largest residential real estate appraisal firm in Central Texas and, as a result, he’s got extensive experience navigating regulatory compliance in the world of real estate appraisal. So he’s here to share his insights into those best practices and challenges companies face when dealing with state regulatory oversight. Thank you for joining us today, doug.

Speaker 3: 1:45

Thank you, ms Murphree, thank you, troy.

Speaker 1: 1:49

Absolutely Well, we’ll start off by defining regulatory compliance. Doug, from your experience, what does regulatory compliance mean for a business operation like Appraisal Shop?

Speaker 3: 2:09

like appraisal shop. Well, we being appraisers fall under USPAP, the Uniform Standards Practice for Professional Appraisal. So it’s a little bit different for us. That’s our overarching thing that we’re always wanting to comply with, but there’s a lot of interpretations of that by TREC and TLCB and Fannie Mae and other government entities, and so you’re always kind of having to be on your toes and since USPAP is something that changes every two years or at least is revisited, we have to be out in front of it. So regulatory compliance to us pretty much starts with USPAP, and USPAP kind of says that if your intended user has something that they want you to do and you know that, then you’re going to also have to comply with that, as long as it’s not in opposition to USPAP. So you kind of need to also understand who your user is and how they interpret it. And so because we have to always be sensitive to that and all the different users and different interpretations, it can be very tricky for appraisers.

Speaker 2: 3:16

Yeah, I completely agree, doug, and businesses that fail to implement effective, solid oversights often face legal challenges, including even potentially regulatory action that can lead to legal consequences that impacts the business’s employees or maybe even a license that the business entity itself holds. Can you share with us some of your insight and experience and knowledge in the appraisal and real estate industries, where you’ve seen maybe some inadequate attention to regulatory compliance that has had an impact on the business?

Speaker 3: 3:55

somehow around for 20, 30 years. So we’ve baby stepped and stubbed our toes and each time we do that we then implement something else to try to prevent that from happening. But I think that a lot of real estate appraisers do not have that opportunity as much, in that they tend to want to operate independently and that doesn’t give them the resources or the time often to dedicate to something like becoming a USPAP instructor or spending time doing teaching or, you know, having the kind of volume and expanse of work product to be able to really see a lot of the different places where we might need to have something in place. So while we’ve been very lucky over the years, we also and I’m going to have to say this multiple times today we rely very much on legal counsel Because of the nature of our business, of the nature of our business.

Speaker 3: 5:09

There’s such a gray area of what USPAP is. I’ve heard it referenced as a aspirational document and it doesn’t give exact guidelines. It simply gives overarching sort of ideas of how to comply, and so I’ve seen many, many appraisers and so I’ve seen many, many appraisers that do not really understand not only how USPAP affects them but how it can be used to actually it really is there to protect appraisers in many, many ways as much as the public. It also is there to protect appraisers, but I do find that the TALCB and Appraisal Institute and most people are very willing to forgive and rehabilitate appraisers. So it’s not the sticky step that it seems to be, as long as the appraiser is knowledgeable and is working towards that greater goal of credibility and the public trust.

Speaker 1: 6:06

Yeah, I would say that’s really important, really crucial, absolutely. And you know, kind of, like you said earlier, compliance is not always super straightforward. What are the most common challenges that you’re seeing real estate appraisal businesses face when they’re trying to stay within those state and federal requirements?

Speaker 3: 6:26

We find, and I think it’s probably common for a lot of different professions. But things are changing very fast. So right now we’re struggling with short-term rental analysis and of course the investors say we can do this, it’s not a problem, just give it to us on a 1007. And I think the reason they say 1007 is because that’s the only way they can communicate in a way that says this is the format we would like. You’re not just going to be able to give us a rental analysis on STR and dream it up one way or another. We need it like the 1007, but they don’t say it that way. They say they need the 1007 and the 1007 isn’t built for short-term rental. And so we’re faced with that and all of our different investors and people coming to us saying, hey, we’d like you to do this for us. And we say, well, we’re going to put it on something like a 1007, but that’s better and they don’t understand that and they don’t want that.

Speaker 3: 7:23

So there’s a lot of, you know, lack of understanding on the other side as well, because another thing about the way appraisers have to operate is we have to be very careful about what we say because of things like predetermined value or a predetermination of value or bias, and so it’s very difficult, and also how we’re perceived by the lenders in how they’re supposed to not allow people to talk to us.

Speaker 3: 7:50

So the people most knowledgeable about the actual appraisal or the purpose are often the people that are furthest from us, and so there’s in-between people all along the way that potentially are giving us bad direction.

Speaker 3: 8:07

And so with a company like mine and with my experience and the people that we hire behind us in terms of attorneys and compliance people, I can be rather forward on saying I want to talk to somebody Independent appraiser, young guy, maybe, an independent guy. They’re not going to be able to do that, and so they could be given direction saying put this on a 1007,. They could be given direction saying put this on a 1007, that’s okay. And they put it on a 1007 and somewhere else down the line, somebody’s gonna maybe not like it, I don’t know, but we at least have um the wherewithal to question and maybe create a situation where we think, okay, this is okay, we’ve talked to our counsel, this is the best we can do. We put in some verbiage and maybe we can move forward with this because we’re getting pressured. We’re getting pressured to do these and I think right now the data is pretty suspect.

Speaker 2: 9:11

And that’s a great point, doug. I’ve seen regulatory cases where businesses, like you said, things are so busy and so moving so fast and especially if you’re a small shop, you may not have the bandwidth to step back and realize maybe there’s a compliance gap here and you know not being able to address it, so you just kind of go through it and then later on, like you said, maybe somebody in the regulatory world has issues with it, maybe Fannie Mae, that kind of thing. You know they might even misunderstand or misinterpret the law or believe what they’re doing is acceptable. Then they just don’t realize it’s not. Sometimes it’s just they completely are unaware of the requirement altogether. So what advice would you give to businesses owners, you know, to kind of minimize and really reduce that risk profile?

Speaker 3: 10:06

Well, I know that there’s a lot of different chats out there and forums, appraisal buzz and different ways that you can and you can read, you know, appraisal Institute valuation magazines. They’re very intense and sometimes don’t speak to exactly what we’re talking about. So you can spend a lot of your time trying to figure it out. Or you can get a good counsel and spend a little bit of money and save yourself a lot of time. In my experience, a little bit of money on the front end has saved us thousands and thousands on the back end, because the back end deals are what get expensive and they also put you in a spot where you’re now having to the next time. They’re saying, well, has this ever happened before? So you’re, you’re having to disclose. It’s just a much, much more painful situation and it has to do with what Troy’s talking about, about putting things in place ahead of time. But I think, putting you know counsel, I think I would spend a whole lot less time speaking with with a really good attorney who knows it than I’ll spend trying to study it up. You know my time could be. I could be writing appraisals during that period. So it’s a cost. It’s a. You know you don’t want to step over a dollar to pick up a dime. I really save a lot of time by going straight to my counsel.

Speaker 3: 11:31

But off of that, we do put things in place. As we stub our toe, we’ll say, okay, well, that’s never going to happen again. So we’re going to put this in place, because it is kind of tough. When I talk to people, I have to be very, very good about how I use my language, and so one of the things we do is we typically will not have our appraisers talking to anybody. They’ll talk to me and I’ll talk to whoever, which works out really well, because often then the ire of whoever I’m talking to if they’re unreasonable will then be focused on me rather than my appraiser, and I’m usually able to handle it, which is, I think, one of the things about an appraisal firm that’s very helpful to the appraisers. But, again, the lure of going out on your own and making 100% is very strong for especially young appraisers and also if you’ve been with a firm where you’re not really getting much from them.

Speaker 1: 12:32

Yeah, I was going to say it sounds like you’ve got to be pretty tenacious when it comes to, you know, being an appraiser. But you know, I really like that. You’ve got kind of those safeguards in place that you’ve implemented to protect your appraisers and to protect your livelihood as well. I mean, I would imagine if something would happen. That’s you got to run it up the chain and that’s another thing that you yourself would have to deal with. So, yeah, it’s good, good protection for your appraisers.

Speaker 3: 13:03

Appraisers have to be tough, there’s no doubt about it. But your best appraisers and I tell my guys this all the time you just have to be cool, calm and competent. It’s tough because it comes at you from a lot of directions. I can give you an example of where we, or I as a firm, made a mistake in an assignment where it was a overpriced property during the pandemic and of course our client was telling us we need you to do this and my guys were all telling me this is severely overpriced and of course we have plenty of work and it just looks like a problem. So we don’t want to do it. We kick it down the road but no one else will get it. So the client comes back and says we need you to do it, we need you to do it and everybody knows it’s too high, it’s not a problem, we just need the appraisal. So I let them go ahead.

Speaker 3: 13:57

But I think in retrospect we all know not everybody knew it was too high. Who didn’t know it was too high was the seller. And unfortunately in our business, the appraisal even though it’s for the lender and it’s written to the lender, anyone can take that appraisal and march it down to the TALCB and say they were hurt by it, and so I neglected to call the seller and I should have called them. But these are conversations you don’t want to have because the seller is not going to be reasonable and they’re going to start asking me questions that I don’t want to talk about, like what’s it going to appraise for them? So it’s very touchy.

Speaker 3: 14:35

When I’m talking to them I have to say things like well, the highest sale in the subdivision is a hundred thousand dollars less than your house. So that might be a challenge. That’s how I have to speak and try to be USPAP compliant. But if I had made that phone call, I probably would have realized that the seller was not rational and was not on board with the fact that maybe and so it ended up being a complaint that we won. But that’s a lot of time and stress for the appraiser. In this case, most of her ire was the seller. I’m sorry. The ire was directed towards me because I was the one who had reached out and was explaining things, and so most of the complaint was things that were between myself and the seller via email, and so that made it probably a lot better than if my appraiser had been right.

Speaker 3: 15:30

They go back and forth.

Speaker 2: 15:33

To piggyback off of what Doug’s saying is that situation he had there. I think another important aspect to keep in mind is making sure you’re getting engaged in the industry and with your regulator. You know, really know your business, not only just other people in your industry who are license holders and run businesses, but also with some of the regulatory folks. Sometimes they really had the inside track and I can say from personal experience being a former regulator, they really don’t bite, you know their bark might be worse than their, than their bite, and they’re usually pretty friendly and you’d be surprised at how eager they are to talk to people that are just trying to figure out how to do it the right way and how to avoid issues, and so, whether it’s going to board meetings or getting involved in committees or working groups, I’ve found that that’s a really good adjunct to what you do while you’re running your business training your employees, that kind of thing.

Speaker 1: 16:36

That’s fantastic for our viewers to know. Absolutely, are there any other important things that businesses can implement now to maintain compliance that you can think of, doug, anything that comes to mind when you’re thinking about immediate changes that a business can make.

Speaker 3: 16:58

Well, in the appraisal industry we have a lot of issues with. I don’t think that we get reasonable engagement letters, especially at the residential level, so that oftentimes the appraisers put in a spot later where and what they end up doing is working for free but without a really good engagement or also asking upfront the questions that you need to know. Oftentimes the attitude is you’re the appraiser, go to the house and find out and let us know, which always puts the appraiser in a bad spot because he doesn’t know what he’s getting into and so it’s just. It’d be a lot easier and better for him to be prepared. But again, the appraisers don’t feel comfortable doing a lot of this because there is blowback In the Austin area, where we’ve been for a long time, our procedures are welcomed by the agents.

Speaker 3: 17:55

We’ve done it for so long that they actually demand some of our procedures which are asking for comps up front, kind of using the VA tidewater type process, and these agents in the Austin area will look forward to this and answer. We’ve noticed as we go into new areas Houston, san Antonio they’re not. They’re back to the old way. Which is why am I doing this? This is your job. I’m not responding to this. It’s almost like the agents think they’re trapped, a little bit Like if they respond with the wrong comps, maybe they have liability or something. I’m not sure what they think. So we like to reach out and kind of make them aware hey, what comps are you using here? And sometimes that’s not appreciated and that’s a business decision that appraisers have to make as to how far they want to go to ask for things that they think will be more transparent, so that everybody understands where we’re at.

Speaker 2: 18:56

Yeah, I couldn’t agree with you more, doug, about the communication, the conversation that goes on between the different players in the industry, whether it’s real estate agents, loan officers and appraisal management companies and that’s really true in any regulated industry. You’ve got more than one license holder, you know in that industry landscape, and trying to work together and understand where everybody’s coming from and being able to do that in a professional and effective manner so that it’s efficient for the business, is really crucial. And that, I think, extends also to, like we were saying earlier, the relationship and the dialogue with the governing regulatory body, because they have a role in those dynamics and those conversations and it just makes a huge difference. When you’re staying connected, communicative and informed with all the players that are involved in the work your business is doing, then you’re being proactive and you’re staying ahead of regulatory changes that can have a, you know, a real big impact on your business.

Speaker 3: 20:09

I teach some CE and one of the classes we developed is just a short two-hour class that can be given for lunch. It’s called Brokers and Appraisers Bridging the Gap where we go into USPAP versus the brokers’ canons of ethics and how they’re different. And also we show them how we do a few of our techniques. We talk about price per square foot and how that can be. We talk about different valuation and these agents will come out of that class saying that it’s the most that they’ve learned in years. It’s very practical. We actually go up and do some adjustments on how to market, extract the contributory value of a pool Very simple things and answer a lot of their questions about just what’s behind the cloak you know, so that they know how the appraisers are operating and why, and just go down a few of the simple things like UAD definitions and things, so that they can watch for these critical things that lead to value and teaching those classes.

Speaker 3: 21:13

I tell you, if you do a favor for an agent, they remember it forever. It’s not like the loan officer what have you done for me? Lately they will remember it and they’ll remember you and they’ll say you helped me with this deal 10 years ago and you’re our favorite firm and we always refer that. It’s very gratifying. We don’t get a lot of that in this business. But the realtors when you help them and they understand what you’re doing and they’ve helped us before get over the hump on a. Why can I go over here and use this comp? Why should I? Well, it’s in the same school district and that’s what the big deal is here. And those agents even though I can go do a $20 million waterfront Lake Austin, I can go to Saginaw and do a double wide, but I don’t know that little neighborhood better than them. That’s just the nature of appraising. We don’t, we can’t just be in one neighborhood. There would never be enough volume. So we have to be, you know Texas wide and be able to do anything, but we don’t know their neighborhood better.

Speaker 3: 22:09

So appraisers that rely on the agents and that the agents are really open to try to explain. We also teach agents that when they’re giving comp selection to appraisers it’s not just their best ones Because of Collateral Underwriter and Fannie Mae’s AI. They need to explain why the bad one sold Because it’s not going to say in the MLS. So if they know that it had a terrible floor plan or there very hard to, or or the there was a atypical motivation. They can help the appraiser not have to use that bad comp because the appraiser will not know about that stuff, it is not going to be recorded in the MLS.

Speaker 3: 22:47

So you got to ask and they they, they should be there telling you hey, that house next door I need you to know that was a divorce and it was ugly and the inside was very difficult to get in. Whatever they want to tell us, it’ll help us to then take that comp, weight it to the back. Collateral underwriter still sees it, so it’s fine. But we can say we’ve weighted this less and we don’t have to value the property based on an inappropriate comp, which is what would normally happen if the appraisers or the realtors are not willing to share that.

Speaker 1: 23:24

That’s good to know. Just again, great information for our Texas appraisers to know. And it sounds like communication is really so big. It sounds like that is really just a crucial point to maintaining that compliance with your state regulatory agency. I know that we’ve kind of harped on it a few times but I want to go back to some of those key takeaways that, again, you know regulatory compliance is absolutely essential for helping regulated businesses run efficiently, reduce their legal risks. We talked about having legal counsel help you out if you don’t understand. Again going back to that communication, asking those questions if you don’t know what’s expected of you, if you are running a business, making sure your employees know what’s expected of them, and again to Troy’s point, engage with your regulatory agency. You may be surprised at the information and how willing they are to divulge that to you. So, yeah, it’s been. This has been a fantastic discussion and just really full of some great takeaways for our viewers and good things they can implement to maintain their compliance.

Speaker 3: 24:45

Well, appraisals are very different because the communication is what is so misunderstood. So the appraisers don’t know what they can say. Appraisers don’t know what they can say and I would personally lean more on a counsel than trying to go to a board. I would much rather have a really good, good counsel. Tell me you can say this If I’m going to send out something ahead of time for my appraisers and have it standardized, I would just run it by my legal counsel as long as they are extremely adept at that particular thing.

Speaker 3: 25:19

USPAP, compliance appraiser, tlcb that’s where I would go with it, just to make it fast and efficient, and I would feel much more comfortable with that myself.

Speaker 1: 25:31

That makes sense. Yeah, I’ll tell you, that’s kind of been the board’s consensus. When we do our podcast with the board, they say, hey, we like talking to legal counsel. They’re able to understand the legal jargon, they’re able to understand the process that you know someone representing themselves pro se would not understand, and so, yeah, I again think that that’s a fantastic point and I feel like the board would agree.

Speaker 3: 26:00

Yeah, 100%. Somebody who can understand the language, just like an appraiser trying to explain something.

Speaker 1: 26:08

Exactly.

Speaker 3: 26:09

That’s very important.

Speaker 2: 26:11

Yep. Doug, thank you so much for sharing your expertise and your experiences with us here today. I think this is going to be really expertise and your experiences with us here today. I think this is going to be really insightful and great information for our viewing audience.

Speaker 1: 26:23

Well, thank you again, doug, for your time this afternoon and thank you to our listeners. You can learn more about Appraisal Shop and the work Doug does by clicking on the link in our description below, and for more information on this topic, you can visit our website, also linked in the description below. And for more information on this topic, you can visit our website, also linked in the description below. Be sure to follow and subscribe to Know your Regulator for more episodes like this. Until next time, stay inspired and continue engaging with your regulatory agency.

Speaker 2: 26:50

Know your Regulator the podcast that inspires you to engage.