Authored by James J. Tierney and Emily Luken.
On May 31, 2017, the FTC filed an administrative complaint alleging that the Louisiana Real Estate Appraisers Board ("Board"), a state agency controlled by real estate appraisers, violated Section 5 of the FTC Act by fixing real estate appraisal fees paid by appraisal management companies ("AMCs"). AMCs act as agents for lenders in arranging real estate appraisals and are licensed and regulated by the Board. The FTC alleges that the Board required AMCs to pay appraisal fees that are equal to or exceed the median fees identified in survey reports commissioned and published by the Board. This action represents the FTC's first enforcement action against a state agency since its victory in North Carolina State Board of Dental Examiners v. FTC, 135 S.Ct. 1101 (2015). An administrative trial is scheduled to begin on January 30, 2018.
FTC Allegations that the Board Suppressed Competition
The FTC complaint specifically identified two ways the Board restrained price competition for appraisal services in Louisiana, and suggested a third price-fixing mechanism. First, the FTC alleged that regulations adopted by the Board displaced market forces. Under the regulations adopted by the Board, AMCs must compensate appraisers at a rate determined by one of three methods: (1) a survey of fees paid by lenders; (2) a fee schedule established by the Board; or (3) fees recently paid by an AMC, adjusted for six factors related to the property and the appraiser's experience. Because the regulations identified these three methods as the exclusive way to establish appraisal fees, it precluded AMCs from arriving at fees through the operation of market forces, for example negotiations between AMCs and individual appraisers.
Second, the FTC alleged that the Board's enforcement of its regulations unreasonably restrained price competition. The Board commissioned and published surveys on fees paid in 2012, 2013 and 2014 that identified the median fees paid by lenders for various types of appraisals. The Board used its investigative and enforcement powers to effectively require AMCs to pay appraisal fees that equal or exceed the median fees identified in its surveys. For example, the Board initiated enforcement actions against 2 AMCs that had negotiated fees below the median fees identified in the surveys commissioned by the Board. Each of these enforcement actions were resolved with the AMCs paying a fine and administrative costs and agreeing that going forward they would pay the median fees identified in the Board's surveys. The FTC alleges that these enforcement actions were closely monitored by other AMCs and that they decided to pay the surveys fees to avoid investigations and sanctions. The FTC alleged that this conduct set a floor for fees that AMCs must pay appraisers.
The FTC complaint also suggests that the Board's conduct may lead to anticompetitive price increases. Although critical facts have been redacted from the public version of the FTC complaint, the FTC notes that the Board's surveys combined responses from lenders and appraisers and that the "appraisers were eager to participate in the survey." It is not hard to imagine why the appraisers were eager to participate. Appraisers have access to the reported survey results and could attempt to manipulate the results by reporting they have received fees that are higher than last year's median. Over time, this conduct would have the effect of ratcheting-up the median fees.
The FTC's Action Is "Just Plain Wrong"
Responding to the FTC's action, the Board's Executive Director said the "FTC is just plain wrong . . . the FTC is seeking to punish a Louisiana state agency for following federal regulatory mandates. Specifically, Dodd-Frank regulations ..." In enacting Dodd-Frank, Congress was concerned that inflated appraisals were a contributing factor to the 2007-08 financial crises. To address this concern, Dodd-Frank included appraisal independence provisions to protect consumers from manipulated appraisals. Dodd-Frank included provisions to prohibit contacts between lenders and appraisers, which led, in part, to the use of AMCs to arrange for appraisal services. Dodd-Frank also required that appraisers be compensated at "customary and reasonable" rates. Dodd-Frank further mandated that the Federal Reserve and other banking agencies establish minimum requirement for state appraisal agencies, such as the Board, to ensure compliance with Dodd-Frank appraisal independence standards. In response, to Dodd-Frank, the Board adopted its regulations implementing Dodd-Frank's "customary and reasonable" requirement for appraisal fees. The Board contends that it was the federal government that required the Board to adopt regulations to ensure AMCs pay "reasonable and customary fees" and that its adoption of a fee survey was a "good faith" effort to comply with federal law.
Any Trial Will Likely Focus on the Competitive Effects of the Board's Conduct
The FTC alleges that the Board is controlled by appraisers and that independent state officials do not supervise the Board's activities. Taking the FTC's complaint at face value, the Board is unlikely to meet the requirements for state action immunity articulated in the U.S. Supreme Court's 2015 North Carolina Dental decision. There, the North Carolina State Board of Dental Examiners, an entity created by a North Carolina statute, sent cease and desist letters to non-dentists who were performing teeth whitening services at a lower cost than licensed dentists. This caused the non-dentists to stop offering teeth whitening services. The Supreme Court, in a 5-3 decision authored by Justice Kennedy, held that the Board was not protected by the Parker state action immunity doctrine. Specifically, because the Board as an active participant in the market that it regulates, under those circumstances immunity only applies when the state entity is subject to active supervision by the State. The Board was not under the active supervision of the state when it interpreted its authorizing statute to include teeth whitening and enforced that interpretation by sending the cease and desist letters, so it was not entitled to immunity.
Without a state action immunity defense, the trial will focus on whether the appraisers' collective action through the Board had an anticompetitive effect on appraisal services in Louisiana and the Board's justification for imposing the fees established by its survey. It will be interesting to see why requiring higher fees that were negotiated by at least two AMCs was necessary to protect Louisiana consumers and the independence of appraisers.
Implications for State Regulatory Agencies
State regulatory boards should expect vigorous enforcement against rules and regulations that deny consumers the benefit of competition. In one of her first actions, FTC Acting Chairman Maureen Ohlhausen created an Economic Liberty Task Force to address regulations that "stifle competition and innovation by preventing newcomers from entering the market, harming consumers through higher prices and fewer choices." This case demonstrates the FTC will not hesitate to bring enforcement actions against state regulatory agencies that have been captured by those with a direct economic interest in the agency's actions. State boards controlled by competitors in the industry they regulate should have adequate antitrust compliance programs in place to ensure their actions do not violate the antitrust laws.
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