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The Federal Trade Commission has determined that the State of Louisiana failed to actively supervise its real estate appraisal board which contained a super-majority of market participants prior to 2017 and the state’s remedial measures taken after the FTC filed its complaint were insufficient to demonstrate that the state would actively supervise the board in the future.
In 2010, Dodd-Frank amended TILA to include language that lenders must compensate appraisers “at a rate that is customary and reasonable” for appraisal services in the relevant market area. In 2013, the Louisiana Real Estate Appraisers Board (“Board”) adopted a regulation on how AMCs must comply with the customary and reasonable requirement, (“AMC Regulation”). The Board is composed of 10 members appointed by the governor: 2 members from the state banker’s association; 7 certified appraisers; and the final member must be an employee or representative of an AMC.
In 2017, the FTC filed a complaint alleging that the AMC Regulation was an unlawful restraint on trade because it prohibited AMCs setting an appraisal fee through the operation of the free market. Initially, the Board filed an affirmative defense that Board was immune from antitrust scrutiny under the state action doctrine and also that the FTC failed to allege that the Board was controlled by active participants in the relevant residential appraisal market. The Board also filed a motion to dismiss the complaint based on the state’s subsequent remedial actions taken after the FTC had filed its complaint.
Following the filing of the FTC complaint, the Board and state officials took action to create further supervision of the Board. The governor issued a directive requiring the Board the change the way it promulgated and enforced rules. First, the governor required the Board to submit all rules to the Commissioner of Administration (“Commissioner”) for review. In response, the Board repealed the AMC Regulation and issued a new regulation (“Revised Regulation”). The Commissioner crafted a statement finding that the Revised Regulation advanced state public policy. The Revised Regulation was then sent to the legislature, where no hearings were held and the Revised Regulation took effect in November 2017.
Second, the governor’s directive called for the state’s Division of Administrative Law (“DAL”) to review the Board’s enforcement actions. The DAL and the Board entered into an agreement establishing the review process for future enforcement proceedings and closed all pending investigations.
The FTC denied the state’s motion to dismiss, finding that the evidence failed to demonstrate that the state actively supervised the issuance of the Revised Regulation or that the state will actively supervise enforcement proceedings in the future. First, the court examined whether the state had actively supervised the issuance of the Revised Regulation. Looking at prior decisions, the FTC found that three elements were necessary to demonstrate active supervision: 1) development of an adequate factual record; 2) a written decision on the merits; and 3) a specific assessment on how the private action comports with substantive standard established by the legislature.
The FTC found that the issuance of the Revised Regulation failed to meet these standards. First, the Commissioner had failed to conduct any hearings or create any sort of record supporting the rulemaking. Second, the only written decision supporting the Revised Regulation was a one-sentence statement from the Commissioner that summarily stated the Revised Regulation furthered the state goals, which the FTC found insufficient. Finally, the legislature failed to approve the Revised Regulation, as it was submitted to the legislature but no action was taken by the legislature or hearings held and so the Revised Regulation took effect by operation of law. Therefore, the FTC determined that the state failed to supervise the issuance of the Revised Regulation.
Next, the FTC examined whether the Board’s new enforcement procedures demonstrated active supervision. The agreement between the DAL and the Board gives the DAL 30 days to review all administrative complaints or settlements. However, when the Board institutes a remedy for violations following an investigation, the DAL review is limited to a determination over whether the Board acted in an arbitrary or capricious manner. This limited scope of review “means that significant aspects of the Board’s activities receive no supervision whatsoever.” Thus, the FTC denied the Board’s motion to dismiss, as the Board had failed to demonstrate it implemented appropriate active supervision following the filing of the complaint.
Finally, the FTC examined the Board’s affirmative defenses. The Board argued that it was not subject to the active supervision requirement because not all the licensed appraisers on the Board provided services in the residential market. The Board is required to have at least four “general” appraisers on it, in addition to at least two “residential” appraisers. The Board believed that whether the Board is controlled by market participants requires a factual examination of the commissioners to determine the appraisal markets in which each commissioner provided services. The FTC rejected this argument and instead adopted a bright line rule: those licensed by the occupational licensing board are considered active market participants. Thus, the FTC dismissed this affirmative defense.
The Board’s final affirmative defense was that Board was actively supervised when it enacted the AMC Regulation. For reasons similar to the FTC’s rejection of the Revised Regulation, the FTC determined that there was no active supervision when the Board enacted the AMC Regulation. The legislature held no hearings on the regulation, and the regulation took effect automatically 45 days after submission. The Board also argued that its enforcement actions were actively supervised because they could be challenged in court, but active supervision requires more than the mere possibility of judicial oversight. The FTC found that neither argument demonstrated active supervision at the time the AMC Regulation was created and thus the FTC dismissed this affirmative defense also.
In re: Louisiana Real Estate Appraisal Board , Docket No. 9374 (F.T.C. Apr. 10, 2018).
Editor’s Note: The Board has appealed the FTC’s determinations for the U.S. Court of Appeals for the Fifth Circuit.